Following on from my post Thinking Differently About Investment Risk I wanted to expand on the theme a bit further. Let me preface this by saying I am not suggesting everyone should invest in alternative investments, but it should give you some food for thought.
The recent volatility in the main investment markets certainly made us look closely at each of our investment solutions to see how they reacted, as any good adviser would. What we discovered made us think long and hard about how we look at different types of investment.
Outside of our standard investment portfolios, which are risk rated and broadly performed as we might expect, our alternative investments did something rather different.
Where we are looking at year to date returns of the low single figures in our managed portfolios across the spectrum we have seen returns of up to 20% in some of our Alternative Investment Market (AIM) and Venture Capital Trust (VCT) portfolios!
The diversity of Alternative investments is worth highlighting at this point. If you have a manager who has a relatively concentrated portfolio (25-30 stocks) in relatively niche markets, generating good margins then it is unlikely, outside of a market crash, that the portfolio will be affected to any great degree by the kind of sentiment driven volatility we have seen on the main markets over the summer.
Tax relief is the big bonus with some alternative investments. If you can receive income tax relief at 30% on Venture Capital Trusts (VCT), as well as tax free dividends, or the benefits of Business Property Relief (BPR) in the form of an Inheritance Tax (IHT) reduction of 40% on an AIM portfolios, then it tends to change the way you look at risk.
Obviously these are just 2 examples, with Enterprise Investment Schemes (EIS) being the other big winner in the tax relief stakes.
Now as with all investments there are good and bad out there and we often are quoted examples of “terrible investments” made by people in years gone by.
That’s why it is important that you employ someone with the necessary knowledge and experience to help navigate what can be a bit of minefield.
These types of alternative investments don’t attract tax relief and deliver the kind of growth potential we see without taking risk, however in the right hands they present great opportunities for investors.
I like to think of it as replacing unpredictable market risk with much more controlled company risk (under normal market conditions).
It should be noted the alternative investments above qualify for tax relief as per HMRC rules and are “hard wired” into legislation, unlike some of the more colourful examples of the past which circumvented or “interpreted” the law.
Would you consider alternative investments? Do you have any examples of where this has worked/failed for you? How would you approach investment if tax relief was available?
I would be delighted to discuss and debate this topic in more detail so please leave a comment or give me a shout.
This is not intended as advice and should not be treated as such and past performance is not an indicator of future returns.
Getting to know our Commercial Director John Moran
A Chartered Accountant by trade, John Moran joins us as our new Commercial Director, looking after our finance and working on areas of our business development too. CEO Adrian Murphy and Marketing Manager Letitia Lam sat down with John, in each of their homes over Zoom, to ask him some questions.Read more