BOITUMELO NTSOKO: Welcome to the Money Savvy podcast. I’m Boitumelo Ntsoko. October is retirement month, and in this and the next two episodes of the series we’ll be focusing on this crucial aspect of financial planning.
In this episode we’re looking at how alternative investments can form part of your retirement plan. Joining us to delve deeper into this topic is Gareth Collier, who is a certified financial planner at Crue Invest. Welcome, Gareth.
GARETH COLLIER: Hi, Tumi, thanks so much.
BOITUMELO NTSOKO: Now, for those who are unsure, please could you explain what alternative investments are?
GARETH COLLIER: Alternative investments will most commonly refer to anything that sits outside of what we would refer to as the ‘formal investment sector’. The formal investment sector generally covers those companies that are listed on a stock exchange, whether local or offshore. ‘Alternative investments’ tend to talk about things like your private equity market investments in maybe private companies and startups, even those hedge funds that look to operate counter to the market. It can also go as far as talking about things like ‘collectibles’ – items such as artwork or vintage cars, or even certain wines and whiskeys that to the right person are quite valuable.
BOITUMELO NTSOKO: Now would one include alternative assets in the retirement plan?
GARETH COLLIER: Alternative assets give you exposure possibly to investment opportunities that sit outside of the listed formal market. You’re not going to be able to trade artwork on a stock exchange, and it can provide a bit of a diversifier away from the general market.
In the private equity space, if you think about it, when you start a new business it doesn’t immediately list on a stock exchange. There’s a growth phase that it has to go through – all businesses that start up in new sectors. If you think about some of the tech giants of the world, we all know they started in a garage; they weren’t listed from day one.
So private companies can give you a bit of exposure to sectors of the market that either aren’t available locally or maybe are so new that they’re just not openly traded as yet.
BOITUMELO NTSOKO: Does a retirement portfolio with alternative assets have a better chance of outperforming one without?
GARETH COLLIER: The honest answer is probably ‘not necessarily’. At the end of the day it will ultimately depend on what those alternative assets are. Like in any investing, in anything we give ourselves exposure to there are elements of risk. Certainly if I try to go and purchase a ‘collectible’ wine, I’m not terribly knowledgeable on that. I could burn my fingers or buy some duds. We would like to think that this would [outperform] and sometimes, if you’ve got a special interest in a certain market segment that other people maybe don’t understand, then sure. Over the long term maybe it will. But on the whole I would probably say ‘not necessarily’.
BOITUMELO NTSOKO: Now, when in your retirement plan would it be ideal to include alternative investments? And when should you rather forego them?
GARETH COLLIER: Let’s look at the collectibles. If you’ve got a particular interest, maybe you’ve got a great understanding of cars and you understand what will be collectible one day, what won’t be and those perceptions of values. Maybe you understand the art market and have an appreciation or realise that somebody is selling a piece that’s possibly underappreciated, and there’s an opportunity to find value in that.
The other very more well-known one that we would look at is if you’re going to do the property sector on a private basis. If something comes up that you could possibly buy – maybe in your profession you are an interior designer, maybe you are a builder or a handyman who can add value to those assets where somebody who doesn’t have that specific skillset wouldn’t be able to.
And then possibly where not [to invest] is where you might have an interest in those [types of possibilities], but not really a great knowledge or understanding, and you can land up burning your fingers a little bit.
BOITUMELO NTSOKO: Just staying on that topic a bit, depending on your age, would it be advisable to add it when you’re younger or maybe when you’re older?
GARETH COLLIER: Look, with any investing time is your biggest asset, provided that that asset is going to grow at a rate greater than your inflation rate.
I suppose the counter to that is you would argue that when you’re a bit older maybe you’ve got a bit more knowledge, maybe a bit more experience and understanding in those certain markets. So again, I think it’s not explicitly linked to the amount of time available. It’s maybe more just a case of that opportunity possibly being undervalued, and you see some value there that others don’t.
BOITUMELO NTSOKO: Now, if you are contemplating adding alternative investments to your retirement portfolio, which ones should you consider?
GARETH COLLIER: I’d probably follow a constant theme here. Maybe stick to what you know and understand. So if you do have an interest in, say, property, and that’s something that you don’t mind investing your time into to understand where you can unlock value, that’s probably always going to be the acid test – whether you should go into something like that or not. If you are part of any kind of hobbies or special-interest groups, maybe you are part of a wine club and you are gaining some knowledge there and getting a better understanding, that might lead you down that field.
BOITUMELO NTSOKO: And then how can you access some of these investments, especially if you perhaps want some offshore exposure as well?
GARETH COLLIER: Look, I think there are a lot of opportunities with certain providers, looking at what they would call alternative assets. Traditionally your hedge funds we would consider to be alternative assets, and those are often available. A lot of companies are structuring sort of private-equity deals as well. Usually a private-equity deal is an opportunity to invest in a privately listed business, and certain companies will facilitate that. What they’ll tend to do is make what they call a prospectus available. That’s a type of detailed document stating what that business is, what it is about, [and] certain projections, expectations.
And then if you are going to invest in those structures, [know] what those exit strategies would be because obviously, if you are in, you would want to make sure that once you’ve had some appreciation or growth on your investment, you’re actually able to exit and yield that growth.
BOITUMELO NTSOKO: What percentage of your portfolio should be dedicated to alternative investments?
GARETH COLLIER: That’s a tricky one to give an exact answer to, because I think it’s going to vary from person to person, [and depend on] your personal needs, your personal asset base, your balance sheet, whatever it might be. Probably a good way to gauge this is that in your retirement plans, your pension/provident funds and your retirement annuities, they are allowed to allocate up to 10 to 15% of those portfolios into these alternative asset classes. That’s probably a good rule of thumb to use – somewhere around maybe 10 to 20%, depending on your personal circumstances.
BOITUMELO NTSOKO: And what are the risks that you should be aware of when investing in alternative investments?
GARETH COLLIER: Probably the key one is always liquidity, because a lot of these deals are done on a private basis where, once you’ve invested in a company or maybe bought one of those collectible assets or whatever the case is, your funds are tied up in those investments. Unless you’ve got a willing buyer down the road, it can be hard. There’s no point in buying a bottle of wine today that’s R50 000 – and all of a sudden it’s worth R5 million. That’s great if it’s valued at that, but if you can’t find anybody willing to pay you that cash for that bottle, it becomes a bit meaningless.
So liquidity can be a bit of a risk, particularly if you’re doing the so-called retirement planning or using these assets to fund your lifestyle in future. You need to make sure you can convert them into cash.
The other [point] on the private-equity stage is that your private businesses don’t have quite as much regulation as your publicly traded companies. Again, the perception could be that they would be a little more risky. But again, you’re being rewarded for that risk because the reality is that the upside potential should be that much higher.
If you think about it, if you are buying into a big established business, for those shares to double in value that business has got to grow quite significantly. But [in] your smaller companies the compounding growth can happen a little faster. Also they can be a little more agile in terms of changes in regulation or market conditions, or whatever the case is.
Also, if they are going to be venturing into business sections that don’t exist yet, they could be opening up markets and dominating market share before anybody can even catch up.
So there is a bit of a balancing act, but certainly liquidity and regulation would probably be your two biggest risks.
BOITUMELO NTSOKO: Thank you, Gareth, for joining us on this episode.
GARETH COLLIER: Thank you, Tumi, so much for inviting me. It’s always great to be here.
BOITUMELO NTSOKO: That was Gareth Collier, who is a certified financial planner at Crue Invest.