Alternative investments

  • Written by 
  • 16/09/2013
Equity income 5 of 6

Residents of the United States, please read this important information before proceeding

Please read this important information before proceeding.

Shares and bonds are obviously not the only investments that can produce a steady income stream. Property is perhaps the most popular alternative and has the attraction that, like dividends, rents generally (though not always) increase over time.

Investing directly in rental property is a viable option for many investors, but requires significant capital. In addition, it is important not to overlook the costs and time involved in maintaining and managing a property portfolio. For investors who want to add property to a smaller portfolio or do not want the complications of being a professional landlord, one option is to invest in real estate funds and shares, including listed real estate investment trusts (REITs).

Investing in infrastructure is less common among individual investors, but is popular with institutions such as pension funds. These investments can include everything from “hard infrastructure” – such as airports and toll roads – to “soft infrastructure”, which includes hospitals and schools. The distinction between property and infrastructure is not always clear, but infrastructure investments are typically associated with long-term contracts and promise relatively stable, predictable cash flow for years or decades to come. While direct infrastructure investing is not usually practical for private investors, it is possible to gain exposure through dedicated infrastructure funds.

Schemes with eye-catching rates of return may be immensely risky, and are typically run by individuals with no track record.

Investors’ appetite for income has also recently led to plenty of investment promotions from unregulated companies that promise an excellent income from investing in all sorts of alternative assets: South American timber plantations, motorhome rentals, shipping container leasing and much more. These usually claim to provide eye-catching rates of return at low risk, but are in fact are immensely risky. The schemes are typically run by individuals with no track record and in many cases are likely to be outright frauds.

A handful of these promotions are based around genuine asset classes: timber, for example, is an investment that historically has shown good returns and offered a hedge against inflation. But you should always avoid the get-rich-quick schemes and only consider investing in reputable established companies with a long public track record. For example, in the case of timber, you could consider one of several US-listed timber REITs, which may offer a rising income as the US housing market recovers.

Investors should be aware that alternative investments often carry risks beyond the ordinary risks of investing. Many alternative investments, especially property, can be illiquid and difficult to dispose of at times. Some alternative investments are also difficult to value accurately on a regular basis and investors may not know the true value of their investment until they decide to sell.