Investigating the performance of alternative assets in the relatively ‘normal’ year of 2021
2022 has been a tumultuous year so far in investment markets globally. Very few investment classes have been spared, from the S&P 500 to the Nasdaq, the NZX through to bitcoin. Even KiwiSaver, the scheme to make everyday Kiwis investors, are feeling the dip.
The previous two years have been much more favourable to investors despite global uncertainty. As a platform that has helped facilitate investment into alternative assets and private markets over the years, we were curious to see relative performances across asset classes and so approached Jarden for some data.
Alternative assets are always harder to measure and compare and the data comes with the caveat that there are various ways to compile the benchmarks with different firms having different compositions. We know that private company valuations are far more complicated than public stock that can be easily analysed with changing market rates.
The following is data direct from Jarden that shows a comparison of different indexes and their returns over the course of the 2021 calendar year. Our confirmation bias could own this data and claim success with a good 16% annual return increase, after all, it far outplays 3 of the entries. Of course, there is more to the data; we also see here two markets, including ASX, that saw equal if not more returns.
Annual market returns to 31 Dec 2021:
§ S&P NZX Investment Grade Bond Index -4.2%
§ S&P/NZX Property Gross Index +2.9%
§ S&P/NZX50 ex REIT Gross with Imputation +2.2%
§ S&P/ASX 200 Accumulation (nzd) +16.4%
§ MSCI ACWI Accumulation (nzd) +25.1%
§ Jarden Alternatives Composite Index (nzd) +16.8%
We see other evidence of a strong year for alternative assets from Prequin’s Investor Outlook 2022, reporting that across private capital an average of 90% of LPs said performance had met or exceeded expectations, compared with 72% of hedge fund investors.
Additionally, Prequin’s recent survey revealed that investors are more committed than ever to alternative assets.
“Institutional investors value the diversification, high absolute and risk-adjusted returns they get from their allocations to alternatives and these benefits have, historically at least, persisted during times of crisis, including both the Global Financial Crisis (GFC) and COVID-19.”
2022 making history
Although there are generally multiple reasons for negative investor sentiment, the common concern globally is inflation. We know it is a problem in NZ but in other examples, US’s inflation rate is near its highest level in 40 years, while the UK has already surpassed that gauge. In April, the NZ Consumer Price Index, which measures what consumers pay for goods and services, was up 8.3% from the previous year and 0.3% for the month. In a response similar to other central banks, the Federal Reserve has begun to raise interest rates to combat inflation and try to get prices back under control. Those measures may be necessary, but they’re also ones that make investors nervous. That’s because, for the strategy to work, it often creates a recession. This may or may not be an attractive proposition, the alternative being more prolonged inflation…
So far we’ve seen how alternative assets performed across 2021 - this may or may not be typical of performances in ”normal” markets, albeit it is hard to imagine 2021 as a normal year!
Hedging against inflation
But what if there was to be prolonged inflation - we know from history that alternative assets have been a great hedge against inflation and often behave countercyclically to economic downturns. Our go-to in these instances is farmland with such compelling historical performance. Inflation soared in the 1970s and early 1980s and thus serves as a benchmark for our current economic environment. It shows us the positive correlation to inflation…. in other words, when inflation goes up, so does the value of agricultural land.
“Looking back, stock market investors found that their portfolios remained relatively flat from 1970 to 1979. Over the same period, U.S. farmland skyrocketed from an average of $197 to $737 per acre, representing a 14 percent annual return for those astute investors who were able to see the opportunity at the start of the decade.” Farmfolio, 2022.
Bill Gates is well aware of this. He’s the owner of 242,000 acres of farmland and is therefore well-positioned to ride out the headwinds of the current downturn.
The rise of private debt
From our office view another assets class we’ve seen taking off is private debt*. The growth we’re seeing reflects the current climate; filling a gap as banking appetites have changed and offering different ways of achieving more flexible non-banking lending solutions to borrowers. A current listing (exclusive to our newsletter subscribers) has seen over 40% ROI in the last year, a phenomenal result. This growth is seen widely with Forbes quoting that private debt is now the third-largest alternative asset class behind private equity and direct real estate with nearly $1 trillion in total assets.
Although there is investor caution among us there are still options to explore. As 2022 unravels we’ll get to see just how ‘normal’ 2021 begins to look, and no doubt witness Bill Gates get richer.
See the latest listings on our marketplace here.
*Private debt is capital invested in debt held by private companies, opposed to private equity, which is capital invested in ownership shares in private companies.
Financial investment involves risk of loss - please seek professional advice before making any investment decisions. The views and opinions expressed in this blog are those of the authors. The information we present is of a general nature and should be used as a place to start your own research. It is not intended as investment or financial advice.