9th February 2024

4 minutes reading time

The Case for Actively Managed Alternative Investments

When investing in global markets, it is common to encounter bumps along the road to significant financial returns. All investments will face factors such as a financial or geopolitical events that impact global economies and can affect the overall value of an investment portfolio. This risk is generally viewed as being unpredictable and difficult to avoid, but the smart, disciplined investor can mitigate this through a well-diversified investment portfolio capable of absorbing the shocks resulting from any financial disruption.

However, diversification should not be limited to traditional investments, like holding equity in a company or an issued bond. It should also extend to ‘alternative’ investments, an asset class that offers a host of opportunities designed to soften the volatility of your investment journey.

This article explores two types of alternative investments in particular: infrastructure and property, both of which are listed across global markets. The benefits of these investments are well known. Starting with property, this asset can react differently to equities and bonds over time. For example, the rental of residential property can be very defensive in nature, regardless of what happens in the stock market, as people will continue to pay the rent of their home or business. Infrastructure investments share this characteristic, as they can generate predictable levels of income  through the essential improvement and maintenance of physical structures and systems that support economic activities.

An investor can invest in listed assets in different ways, most commonly through either active or passively managed investment strategies. Active investing takes a hands-on approach, typically led by a portfolio manager who aims to beat the average market return. A passive investor, on the other hand, simply owns a wide basket of assets with the aim of achieving a return that replicates a particular market. Each has its benefits and drawbacks, but an unconstrained investment manager can exploit both approaches to maximise the return on your investment.

If we apply this idea to property to begin with, history has shown it pays to be active within the asset class. Looking at the aftermath of the COVID-19 pandemic, the property sector underwent a major structural shift after governments shut down economies to protect the health of their populations. This forced employees to work from home where they could, instead of commuting to the office, thereby changing the work dynamic forever. The change came in two forms.

First, it left a batch of unloved property assets as companies decided to scale down their offices and opt for more environmentally friendly and efficient buildings. This caused older, now viewed as obsolete, properties to become undesirable and to fall in value markedly, an outcome that a passive property investor would have been fully exposed to. By contrast, an active property investor could have avoided this and would have been better equipped to capture the second structural shift, the desire for data.

Data demand surged due to the pandemic, as millions of people had to learn and work from home. Data platform Statista reported that the total amount of data created and consumed reached 64.2 zettabytes in 2020. This amount is expected to nearly triple to 180 zettabytes by 2025, creating a raw demand for data centres and presenting a great investment opportunity.

There is a similarly attractive case to be made for active management over passive within infrastructure investment too. For example, it is commonplace for passive infrastructure funds to have a large allocation to utility companies. While some of these companies maintain the infrastructure of an economy, they are frequently held in investor portfolios already due to them being listed on some of the world’s largest stock markets. This duplication can create pockets of concentration in portfolios, increasing risk as a result. Instead of doubling up on holdings, active managers can capture the growing demand for renewable energy assets.

The Institute for Economic Affairs has emphasised the need for growth in renewables to help electricity generation become completely decarbonised, moving us closer to achieving net zero emissions by 2050 . With population growth, rapid urbanisation, and a transformation of our energy system underway, people are demanding more from these assets than ever before. An active allocation to these assets in your portfolio would help capture this structural trend, offering the potential for significant investment returns, as well as clear environmental benefits.

Just as the finches Charles Darwin discovered on the Galápagos islands evolved over millions of years to thrive in their environment, a similar evolutionary pattern is happening across the property and infrastructure sectors as modern societies develop. While there are challenges ahead, these evolving trends also provide significant opportunities for investors. With the right stock selection process, we believe active management of these assets can help achieve sustainable long-term returns.