KEY POINTS:
Investors wanting to gain access to their money on a short or medium term basis should think twice about putting it into alternative investments like unlisted property, hedge funds, forestry or infrastructure, an investment specialist has warned.
Russell Investment Group has released a paper calling for investors to
recognise the higher risks associated with investing in alternative assets and the difficulty in cashing the investment up.
Russell's head of capital markets research, Dr Geoff Warren, said the push to invest in alternatives came from people looking for ways to diversify their investments while also accessing a higher premium. But there were a number of risks and challenges that were often being overlooked.
"We are not against moving into alternative assets, they do diversify portfolios and can give high returns, but recent sub-prime issues have brought the liquidity issue to our attention."
Warren said investors wanting to sell out of an alternative asset faced losing money on it because a flood of other investors were also trying to get out. It was also very difficult to put a value on the investment because they are not often traded on any kind of public exchange, he said.
Warren said there were an increasing number of institutions investing in alternative assets but individual investors needed to think about their personal situation.
"A strategy that is appropriate for a well-funded university endowment fund may not suit a public offer super fund or a retired couple in their 70s.
"If you have a long term investment time horizon it might be fine for you. But if there is a chance you may need the money quickly ... it may not be a very good idea."
Warren said if was also important to understand the type of investment.
Russell New Zealand managing director Ed Schuck said there had been a definite move towards investing in alternative assets by New Zealand community trusts and retirement schemes in the last five years.
Schuck said prior to 2000 the investment level was nil but a downturn in the equity markets from 2000 to 2003 had led institutions to look elsewhere.
He said the average institutional investment scheme now had about 15 per cent invested in alternative assets.
The move has also been followed by the New Zealand Super fund which announced in March 2005 that it would be increasing its investment in alternative assets. In June, it had eight per cent invested in private markets but its long term goal is to have around 20 per cent of the fund invested in alternative assets.
Institute of Financial Advisers vice-president Nigel Tate said very few individual investors had money in alternative investments but there was a growing interest in it.
"They are not mainstream as yet but have a part to play."
Tate said in particular the asset class was a useful tool in superannuation funds, where a longer time horizon could ride out the volatility of the investment and as such were likely to be part of the investment plans for many KiwiSaver fund managers.