Durrant Pate/Contributor

Alternative investments are emerging as an ideal assets class for the savvy Jamaican investor, given that traditional assets have taken a hit since the COVID-19 pandemic due to surges in inflation and rising interest rates to combat high prices.

In spite of these forces, which have resulted in the Jamaica Stock Exchange (JSE) plummeting, alternative investments, which are asset classes other than traditional securities like stocks and bonds, have remained attractive. Alternative investments include investments in five main categories: hedge funds, private capital, natural resources, real estate, and infrastructure.

When integrated into an investment portfolio, alternative investments can achieve higher risk-adjusted returns and potentially reduce overall volatility. NCB Capital Markets, which is the prominent domestic player, is making out a case for alternative investments in more investment portfolios, whilst noting that the decline in the prices of traditional assets have led to a falloff in gains in the typical portfolio consisting of mainly traditional assets such as stocks and bonds.

More diverse portfolio with alternative investments

NCB Cap Markets reports that in 2022, the traditional 60/40 portfolio consisting of stocks in the JSE All Composite Index and the bonds from the JSE Jamaica Global Bond Index, would have declined by more than 11 per cent, as both stocks and bonds experienced significant losses. This has strengthened the case for having a more diverse portfolio with alternative investments giving greater capital growth and capital protection in an environment of high inflation and interest rates and has led to some investors questioning the effectiveness of a 60/40 strategy.

To this end, investors have sought alternative strategies which include, the addition of alternative investments to their portfolio. Due to their low correlation with traditional assets meaning alternative investments do not move in the same direction to a great degree with traditional investments but offer diversification benefits, make them an added counter-balance within a portfolio.

NCB Cap Markets makes the point that, “certain assets within this group, such as gold and real estate, possess inflation-hedging characteristics. This makes them particularly valuable in portfolio construction, especially in the current context of globally inflation though declining, still being elevated.”

Benefits to the portfolio

The benefits that alternative investments add in diversifying portfolios have driven greater demand for the assets in recent years, which is expected to continue as investors seek out more tailor made solutions that will limit losses and sustain positive returns. In fact, it has been assessed that “annualised returns over the decade for a portfolio consisting alternatives hovered around 8.6 per cent, which was 1.5 percentage points more than its benchmark and 0.7 percentage points more than a 60/40 portfolio.”

Locally and regionally, the growing demand for exposure to alternatives is evident with the increased number of financial companies that have launched alternative investment funds, and increased private capital investments.

This is evident with the introduction of NCB Capital Markets Stratus that launched its Infrastructure Fund, Caribbean Mezzanine Fund, and Regional Opportunity Fund; Sygnus Group Limited, which focuses on private capital and infrastructure; Eppley, which focuses on infrastructure, real estate and private credit; and Proven Investments focusing on real estate and private capital.

Alternative investments gaining popularity

All of these companies have entered the alternative investment space to fill the gaps in the financial solutions market while generating higher returns for investors. The increased supply or access to alternative assets also reflects the rise in demand from local and regional investors, especially institutional, who continue to recognise the added value it brings to their portfolio.

However, NCB Cap Market is emphasising that “like traditional investments, the risks associated should not be ignored. The main reason for including alternative investments in a portfolio is their ability to generate greater risk-adjusted returns, which takes into account, not only the returns, but also the risk needed to achieve it.”

Although the performance history of local alternative offerings is still nascent, notable growth has been observed in two of NCB Stratus funds. The Infrastructure Funds and the Tourism Response Impact Portfolio have registered respective growths of 12.0 per cent and 13.6 per cent in net asset value per share since their inception.