Alternative Investments - Options For Investors?

Residential property prices have crashed. The stock market smashed last year. With the base rate at 0.5%, the best bank accounts aren't yielding much more than 3%. No wonder investors are looking for alternatives. Even if they only offered similar returns to cash and equity investment, alternative investments would still provide portfolio diversification.
So what are the some of the options available to investors?

Agricultural investment

One interesting alternative is agricultural investment. Buying an arable farm might not be realistic for most investors, but pooled investment funds now allow investors to put as little as £1,000 a time into jatropha plantations (a form of biofuel) via Green Oil Investments, wheat in Western Australia via Hurlingham Capital, and teak plantations in Costa Rica via Costa Rica Invest.

While investors could equally - and more easily - purchase a commodities ETF, these investments give an exposure to land values as well as commodity prices and income. Hurlingham's wheat based investments offer low risk (the capital value is partly protected) together with yields around 8% a year, and terms from 5 to 7 years. These look highly attractive for the income investor. Other prospects, such as some of the biofuels investments on the market, offer much higher returns, but have potentially higher risks, being based in countries where political risk is high. Not all such schemes offer annual returns; some require a 5-15 year investment period (for instance, in teak, even if bought as an existing plantation).

This is still a fairly new area of investment, and investors should do due diligence on the legal small print of the scheme as well as the underlying investment story.

Forestry

Forestry, on the other hand, has a long history as an investment for high net worth individuals in the UK. There are substantial tax breaks for forestry - no income tax or CGT is payable, and forestry investments are free of inheritance tax liability once they have been owned for two years.

Yields are volatile but can be nifty. Although forestry returns fell from the 31.6% enjoyed in 2007, 2008 still saw a 7% total annual return - way ahead of the commercial or residential property sectors or the stock market.

However, it's an expensive business to get into - funds are available through FIM, but the minimum investment is £50,000. And this is a long term investment - it can take twenty years to harvest a plantation, during which time there's no income.

Vintage cars and boats

More 'lifestyle' investments include vintage cars and boats. Here again there's potentially a tax advantage - since they count as wasting assets, such assets have no CGT liability. (Don't forget though that this also means losses can't be claimed against profits on other assets such as shares.) Pre-1973 cars also have a zero rate of road tax - though you'll still need to get them MOT'd.

For novice vintage car owners, a good suggestion is to choose a car with a strong owners' club, which is a good source of advice. Owners will need to be able to maintain the vehicle in pristine condition - so this is not an investment to undertake if you're occasionally short of funds. In fact, it will cost money every year, in insurance and maintenance, and pays no income - so if you don't make a good capital return at the end of it, you've lost out. However, it's a market that can be entered at a relatively low cost. For instance an MGB Roadster will set you back £6-8,000 - less than a new Ford Mondeo. And of course if you want to drive the car, no one's stopping you - though more than a few hundred miles a year, and you could be reducing the capital value of the car.

There is no index for vintage car prices, so investors need to research the price history for the specific car they're looking at. Some cars have done well - others, though, have fallen back. Morris Minors have lost 40% of their value since the 1980s. Investors need to do their own work here - there don't appear to be any investment managers or advisers in this field, as there are in forestry or wine investment.

It can also be difficult to sell, particularly at the high end of the market. In a recession, it's going to be difficult to offload a vintage Bugatti - and auction houses such as Bonhams (http://www.bonhams.com), which has a specialised vintage car department, have high charges.

Investment in art

Investment in art is perhaps the most attractive lifestyle investment; again, the entry point can be quite low, particularly with modern prints. You can still get a Picasso print for less than £1,000.

However, though art is often sold as 'recession proof', this is not true. The art world is prone to bubbles - pop art, particularly Andy Warhol, fetched high prices in 2007, but the bottom fell out of the market last year. And several high value works by BritArt doyen Damien Hirst failed to sell in the immediate aftermath of the Lehman crash. On the other hand if you buy works by an artist or school that isn't currently in fashion, and they get 'discovered', you could strike it lucky.

Anyone considering investing in the art market should consider exhaustive research before getting their wallets out. The auction houses, Christie's and Sotheby's, are a good source of information, though of course they do have a vested interest; http://Artprice.com is another excellent resource. But taste is subjective, of course - there is no objective value criterion to refer to, as there is with equities.

So although art investment offers both the prospect of diversification, and positive returns, it's difficult to see how investors can achieve this in practice.

It's also worth noting that art is another illiquid market, with high transaction costs to both buyers and sellers (auction houses charge a buyer's premium of 10%). It is not a market for 'flipping' or short term traders. There are no tax advantages to an investment in art, and those wanting to buy pictures to put in a SIPP should notice that they won't be able to hang them on the wall - personal use of SIPP assets is barred.

However the big difficulty with both vintage cars and art investment is that it's fatally easy to confuse rational investment with emotional attraction. That's even worse with another alternative investment, wine - because at least with art, if you hang a picture on the wall, it doesn't destroy its investment value. With wine, open your long-cellared bottle, and your investment has just disappeared.

Wine

However wine has done extremely well in the past few years. The Liv-Ex wine index stood at 120 in 2005, and had reached 264 in summer 2009. By definition, the annual supply of wine from the top vineyards in France can't increase. Vintage wine also improves with age, so the longer you hold it, the more the price should increase, if you've made the right selection to start with.

Wine is another investment that is free of capital gains tax. If you buy it 'in bond', as a pure investment, you also don't have to pay excise duty - a significant saving. There are a number of advisers in this market; Albany Wines provides advice for investors wanting to invest in Bordeaux wines, and suggests £10-20,000 as a good starting amount to create a diversified portfolio.

Of course wine is purely a capital play; there is no income during the term of the investment. To compare wine with equities, then, you'd have to compare not just the prices, but the total return on equities, including dividend income - and once you do this, the returns from wine don't look quite that attractive. Investors should also note that this has been a favoured area for scams and frauds - a number of firms set up to help investors buy wine en primeur (basically a forward contract) went bust, having not passed investors' money on to the vineyard. Check out http://www.investdrinks.org before parting with any money.

Conclusion

Alternative investment can provide helpful diversification for a portfolio. However, it requires at least the same degree of rigour, discipline and scrutiny as traditional stock market investing, if not more given that these classes of assets tend to be far less regulated. Each market has its idiosyncrasies and there are a number of major pitfalls, not least the potential for liquidity to dry up and the exposure to changes in taste.