Back to Basics
It’s time to face the facts. In the past thirty years, traditional investments such as stocks, bonds, mutual funds and ETFs have been seen as the primary building block of a lucrative portfolio. Yet, all good things must come to an end, and it seems that these types of investments are doing just that. In fact, according to Steve Diggle of Vulpes Investment Management, “ …$10 trillion worth of bonds right now that [sic] are giving negative yields.” Interest rates are at historic lows and the returns, predictably so, are just not there. So, where do we turn if traditional investments are no longer the way to build long-term sustainable wealth?
Alternative alternatives. Put more simply, basic businesses. Businesses such as farms, water-access rights and sand mines are being increasingly looked to as a way to responsibly manage risk while earning a strong return, even if said return is a bit lower than the stocks and bonds of the past. The chances that stocks and bonds will result in desirable risk-adjusted returns over the next thirty years is low, to say the least. Areas such as farming, on the other hand, are good inflation hedges and since the crash of 2007, are proving themselves a more viable option than the current negative yield of bonds. In addition to reducing a portfolio’s risk profile, these alternative investments also offer investors a more active role in their possible returns.
Sean O’Shea of private equity firm Sienna Capital Partners claims “If something goes bad, you are held at the whim of how that asset performs. We have physical assets that you can feel and touch, and there is something you can do to increase its value. You help to support that value if you’re actively involved.” By emphasizing the tangible nature of these assets, O’Shea is able to feel he is taking on a significant role in their performance. When something goes wrong, he can pick up the phone, speak to who is responsible for managing the situation, and see what he can do to either help out or mitigate potential repercussions. At the very least, this sort of physical contact provides solace to some extent in the event that assets do not do as well as they should. Basic businesses offer what traditional investments cannot: a sense of control.
Of course, not all equity firms agree that such a hands-on approach is advisable. In fact, Jack Hon (a founder of recently created Wide Growth) prefers to not be actively involved in the management of such physical assets, and chooses instead to only invest in areas where he is less familiar with community happenings. He feels that investing in an area he knows well is to inspire bias, and it is for this reason that he instead chooses to invest in firms such as a mining company in Australia (his firm is based out of Singapore). This way, he is able to remain more objective in managing assets.
This all said, the more tangible nature of a basic business and the relatively low-risk profile is not the only reason investors are increasingly interested. Indeed, basic businesses and the opportunity they pose for diversification are as attractive as anything else. In the very recent past, it was popular belief that stocks and bond prices tended to move independently of one another. Now, not so much. In the wake of the 2008 crash, correlations between stocks and bonds have significantly increased, thus making diversification between the two less advisable. Basic businesses lie outside of this correlation and are consequently less vulnerable to fluctuation.
As we look to our fiscal future, it seems the past is our best indicator. By exploring “alternative alternatives,” we are actually reverting to the most traditional form of investment, property and basic businesses. At the Opes Group, we help a lot of new (and sometimes established) businesses to gain traction. Many are investment opportunities that you may want to consider before your next mutual fund investment. Traditional investments offer liquidity, yes, but at what cost? Please feel to contact me if you would like to learn about the superior returns offered by some of our ground-breaking entrepreneurs.