How you can explore another avenue to successful investment

The richest investors have loaded up on alternative assets and there are three areas where the everyday investor can join them.

Investors can buy gold in the form of exchange-traded funds.

What was the old joke from the 1960s: “Why can’t we be alternative like everybody else!”

Just now it seems like the richer you are the more likely you are to be “big in alternatives”. Top investors such as family offices now have almost half their investments in this enduring – if sometimes murky – category.

Why? Well mainstream markets regularly just don’t pay as well.

This week we hit a two-month low on the ASX. The turnover levels inside the market are at depressed levels and there are virtually no new floats.

Since the start of January, the ASX has managed the grand total of a 3 per cent advance, and most of that was made when you were still on your summer holidays.

The biggest stocks – the banks and miners – are particularly adrift. There is no obvious catalyst to drive bank stocks higher, while there are also indications that some key commodities such as iron ore may wilt as prices slip from the heights achieved in the past 12 months.

On global markets we have had the debt ceiling circus overhanging Wall Street. while Germany – the beating heart of the European economy – has gone into recession.

In this atmosphere, the sharemarket becomes trickier than ever. Speculative fever can build in one corner, while there is carnage somewhere else.

Take these two examples: on Nasdaq, chipmaker Nvidia (Australia’s fourth most popular overseas stock) has become the proxy for the potential of artificial intelligence. It has more than doubled in price this year. In fact, it is close to joining the “trillion dollars market capitalisation” club.

By any orthodox analysis, Nvidia is massively overvalued, but the market always needs something to bet on. It is selling at nearly 30 times revenue! We are talking about dot.com valuations here. We just don’t know if Nvidia is the Amazon or AOL (remember that?) of this new “new thing”.

Meanwhile, in the real world, stocks exposed to retail or office occupancy are looking into a pit of despair. Conventional companies do not get upgraded if they do well. But if they fail to impress, the sell-off is severe.

Alternative investments are becoming increasingly popular.

We found out this week that Australian retail sales growth for the month of April was, ahem, zero Then clothing retailer Universal Store issued a humdrum result and it was sold off by 25 per cent in an afternoon.

In other words, despite spots of sunshine, the sharemarket – especially the ASX, is a minefield this year.

As investors, if we learnt anything from the pandemic it is that the very rich always stay ahead of the game. This week, New York-based Goldman Sachs released its global private wealth report that tells us the very rich have exactly 44 per cent of their assets in alternatives.

As Tony Pasquariello – who has the intriguing title of co-lead of the One Goldman Sachs Family Office Initiative – told our stablemate Barrons, the sharemarket is just a corner of the investing activity for his crazy rich clients: “For all these changes in the market in the past couple of years this [ultra high net worth] group has been rock solid in their commitment to taking risk, particularly their commitment to taking risks in alternatives,” he said.

For most investors, a lot of ­alternatives such as hedge funds or private equity ventures are inaccessible – unless you qualify as a sophisticated investor where you must have $2.5m in assets or make more than $250,000 a year for two years in a row.

But there are at least three “alternative” assets that are mostly open to the everyday “non-sophisticated investor”.

These are not recommendations, except to say I have held each asset in my own self-managed super fund for years and they have all performed very much as promised, which can’t be said for many shares, even market fav­ourites.

Gold

As a private investor you can very easily buy gold – we are talking here about the commodity, as opposed to gold mining stocks.

Yes, the so-called “gold bugs” are mindlessly optimistic about the outlook for gold, and it’s true it does not pay income. Separately, there are concerns about the level of the US dollar or the ability of central banks to move the market.

But here’s the thing: in Australian dollars, the gold price is up 15 per cent in six months and 73 per cent in five years. As an “alternative”, that is surely attractive, not to mention its historic performance as a non-correlated asset that can go up when everything else is going down.

You don’t have to be furtively slipping your gold bars into bank vaults any longer (what’s more, those bank vaults are booked out anyway). Rather, you can buy gold in the form of exchange-traded funds. Two popular funds are Global X Physical Gold and BetaShares Gold Bullion.

Closer to the bullion itself, you can buy allocated or unallocated gold from the Perth Mint – that is, assuming you are comfortable that the mint can manage to have a year without some sort of scandal, which would make a pleasant change for all concerned.

Secured mortgages

This is a growing area and lucrative for the income-seeking investor. It is not as safe as putting your money into a government-guaranteed bank, and it is not as dangerous as allocating funds towards your brother-in-law’s ambitious plans to redevelop the block across the road from his shop.

Put simply, secured mortgage funds will pay in the range of 7-10 per cent, depending on the nature of the underlying property projects, which are invariably industrial properties such as factories, warehouses and other commercial developments.

As alternative investments go, this asset class has a defensive ­nature because the mortgages are secured against the underlying property – if something goes wrong, there is an asset to sell.

As rates have risen, secured mortgages – also called first mortgages – have become even more attractive as the headline rates can now climb into double digits.

Some advisers will offer a service to all clients where the adviser keeps a tab on a rolling book of such funds. Among the best known players here are Balmain and La Trobe. The key is to pick the best deals with medium risk and maximum reward.

Private credit

This is unlisted territory, so liquidity should not be a concern for you here. If the investment is made from your super and you are not retired, then why should liquidity be an issue?

There are a range of funds in this area and in general they offer a firm promise – or target – above the cash rate. At the moment many of these funds offer between 4 per cent and 5 per cent above the RBA cash rate – so you are talking close to 8-10 per cent.

Among the best known players in this area are Metrics and Realm.

This is investment in the world of debt securities, loans, note and other tradeable securities. In common with many unlisted or alternative investments, a lot hangs on the reputation of the provider. Does it have a track record? Does it operate within the boundaries of risk that they promised.

For most alternative assets you need to deal with an adviser that can point you in the right direction, but if you are thinking about your investment for the longer term and you want a break from the “volatility” – otherwise known as the rolling angst, delight and ­occasional delirium of the sharemarket – it is worth making a start here.