Alternative Investment: Other Investments (8 of 8)

Alternative Investment: Other Investments (8 of 8)

alternative-investment

There are other investments that do not fall into the other sectors, some of which are explored in this section

Risk Level

'Other Investments' are Risk Level 8 of 8 in Alternative Investments.

Investment Case

There are other alternative investments that do not categorise easily in any particular sector. These include: carbon credits, forex trading, film rights, sports media, traded life policies, shipping containers, burial plots, recycling and land fill.

Characteristics

The key characteristic of all of these investments is they offer unique opportunities not available through any of the traditional investment channels. They may also be of personal interest, offering investors the opportunity to learn and become involved with entertaining areas of diversified asset growth. Catholic Healthcare Investment Management (US based) previously described investment in esoterics as a potential route to alpha returns, while identifying a trend amongst investors towards esoteric assets classes in a “barbell approach”: mixing very short-dated assets with very long-dated assets to try and achieve a balance between risk and return.

Speculation Or Diversification?

These investments are certainly diverse and unlikely to be correlated with mainstream assets. They also offer the potential for high returns and tend to be highly speculative. For many people, the investments are too speculative to be considered as useful diversifiers - however they can be viewed as an interesting way of taking a punt, rather than a core holding within a portfolio. For those who do choose to invest in these assets for the longer term, it is important that liquidity and liability risk is well managed by advisers and providers, while the tax and administrative implications of holding these more exclusive esoterics are also made clear.

Market Snapshot

These investments can be difficult to understand and are not always considered suitable for mainstream retail investors. Examples of the unpredictability of the market include the Financial Conduct Authority’s recent decision to brand the sale of all traded life settlement policies as potentially toxic after some high profile failures and the controversy around film investments schemes - initially sold as tax shelters before a crack down by HM Revenue & Customs hit tax relief benefits.

Findings

Traded Life Policy Investments

Life settlement funds purchase unwanted life insurance contracts from elderly US citizens, who no longer want them or who are terminally ill. The funds then continue to pay an annual premium and pay out proceeds when the insured policyholder dies. They are also referred to as ‘death bonds’. The pooling of such polices reduces the risk of decreased yields, however it should also be noted that potential risk does exist from an insurance company refusing to pay out on a policy or policies.

The funds typically take the form of Open Ended Investment Companies (OEICs) or Protected Cell Companies (PCC) and are classed as Unregulated Collective Investment Schemes (UCIS) by the Financial Conduct Authority. Minimum investments start at £25,000 and offer variable investor returns, both through an annual return and also capital growth based on the net asset value (NAV) of the investors’ shares.

Whilst offering uncorrelated returns, the underlying assets are unpredictable and illiquid. This has caused some funds difficulty and TLPIs attracted censure from the Financial Conduct Authority in January 2012, when it branded the entire asset class as toxic and ruled they must not be promoted or sold to the mass retail investor market after failure of product provider Keydata.

Carbon Credits

Carbon credits are issued to offset projects verified to reduce the amount of carbon in the atmosphere. One carbon credit is equivalent to one tonne of carbon dioxide, which is a major greenhouse gas and contributor to climate change. Once issued, the credits are tradeable in secondary markets, with many companies purchasing carbon credits to offset their own carbon emissions. Ultimately the intention is to set a price on emitting carbon and allow market mechanisms to drive industrial and commercial processes in the direction of low emissions.

The two main types of carbon credits are Certified Emission Reductions (CER) and Voluntary Emission Reductions (VER). CERs have higher standards of compliance, but VERs are the fastest growing market and are primarily sold to companies who wish to voluntarily offset carbon emissions.

The subject of carbon credits and their role in reducing emissions is controversial, with difficulties such as additionality, comparing projects on a like-for-like basis and establishing transparent exchanges, causing concern. The market is still relatively immature and successfully trading on the secondary markets is difficult without expertise and experience. Perhaps more appealing to retail investors is the concept of investing in carbon credit generation projects – such as reforestation.

These schemes have also been controversial and many look and feel similar to land banking scams – selling land at an inflated price with the promise that it will qualify for carbon credits at a later date. Investors interested in investing in schemes need to verify how the land is owned and that there is a likelihood of it qualifying for carbon credits. They also need to take a view on the future price of carbon to establish if the investment stacks up.

Film Investments

According to Ingenious Investments, between 2004 and 2008 Wall Street contributed an estimated $20bln through specialist funds to finance the production and distribution of feature films. However, after the financial crisis of 2008 mainstream financial institutions retracted their support for the sector as they sought to streamline their operations. Providers instead turned to the retail investment market to fill the funding gap and a number of investments based on owning film rights have been marketed to retail investors. A number of these have been structured as Enterprise Investment Schemes (EIS) that can give up-front tax relief of 20% and no Capital Gains Tax when it’s sold (provided it has been held for at least three years).

As an asset class, film displays a number of fundamentally attractive investment characteristics: a growth market, low correlation, the opportunity for portfolio diversification, and diverse, long-term revenue streams. Sometimes a range of more exciting benefits are offered, including credit as a producer, the opportunity to visit the set, the chance to appear in the film and invitations to the premier!

However, as with all the investments in this sector, Film Rights remain illiquid, esoteric and high risk. Some products also ran into some problems with their status as tax shelters after HMRC branded the Eclipse 35 film partnership scheme as ‘aggressive’ tax avoidance.

Summary

Investments in this category cover a broad range of asset classes, product structures, time horizons and levels of return.

Investor Conclusions

For investors and their intermediaries, these types of products will appeal because they are different, unique and interesting. They may well offer a source of uncorrelated returns and diversification, but they are also very speculative and not appropriate as core portfolio holdings. However, like all alternatives, there has been a flow of funds to this sector since the start of the financial crisis.

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