LUXURY INVESTMENT INDEX
long term, returning an average of 6.5% over the last century. In addition, forestry has historically performed well when markets have fallen – it has a low correlation to traditional asset classes. Forestry is also a classic hedge against high inflation: not only is forestry a tangible commodity, but as the trees grow their value should increase in line with inflation. Biological tree growth tends to offset any depreciation in timber prices.
Supply and Demand The global timber trade is valued at over £372 billion a year with estimates that demand for timber will increase 60% by 2030 (United Nations Food and Agriculture Organization). This growth will be driven by both economic and population growth in India, China and the rest of Asia. However, there are new constraints upon supply. Governments and international NGOs are legislating to prevent both illegal and unsustainable logging, which taken together account for as much as 70% of timber sold.
ISSUE 01
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NOVEMBER / DECEMBER 2013
ENERGY
Energy has been a long-standing classic defensive investment, but the drivers for investment are starting to change.
“Peak Oil” It’s not just oil actually – all of our reserves of fossil fuels are dwindling. According to BP, at the current price and using current technologies we have about 46 years of oil reserves left, 58 years of gas and 118 years of coal. Activities such as recovering oil from tar sands or deep-water drilling are now more commonplace, but are also more dangerous and expensive – witness the £24billion cost to BP of the Deepwater Horizon disaster in the Gulf of Mexico.
Global Demand
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At the same time as supply is reducing, demand is growing, driven by the growth of China (which accounted for over 70% of the growth in consumption in 2011), India and other emerging markets. Shell estimate that energy demand will double by 2050. There are short term surprises on both the upside and the downside – such as the shale gas ‘bonanza’ in the US or the withdrawal of support for nuclear power after the Fukushima disaster in Japan – but the broad trends are pretty clear. The contraction of supply and increase in demand is likely to
have a profound effect on availability and push up prices. Companies that can benefit from this will be attractive investments.
Environmental Concerns and New Opportunities As well as being non-renewable, fossil fuels are also pollutants that contribute towards climate change. Global carbon emissions are approximately twice as high as they were in the 1970s and governments are seeking to legislate to reduce pollution. The best-known target was agreed as part of the Kyoto Protocol in 1997: 20% of energy from renewable sources by 2020. The UK, EU and many other governments signed up to this commitment, although both the US and China were notable abstainers. Nevertheless, the search for clean, renewable sources of energy to replace fossil fuels is driving a new phase of investment, and unsurprisingly this is where the alternative investment market has focused.
PRECIOUS METALS Store of Wealth Many investors are turning to precious metals as an alternative store of wealth. Disillusioned with negative real returns on cash, depreciating currencies, the possibility of future inflation and volatile or moribund markets in other assets, finding a sensible store of value is difficult. This has certainly been one of the factors behind the rise in the gold price over the last 10 years. Investors of all kinds, from retail investors to central banks and sovereign wealth funds are seeing gold as a secure store of wealth and the currency of last resort. Some investors are also choosing to store wealth in silver and diamonds – taking the view that rare tangible assets provide some security from inflation and financial repression.
Industrial Demand There is very little industrial demand or utility for gold – its value lies in its function as a store of wealth or currency. Silver is a half-way house – it has some value because it is recognised as a tradable store of wealth but it is also used in the electronics industry and industrial demand accounts for over half of total silver fabrication. Diamonds split nicely into two – there is a huge amount of industrial demand, but this is met through the production of synthetic diamonds. Gemstone diamonds are mined and are much rarer, and therefore do have some value as a store of wealth.
Rare earth metals are at the other end of the spectrum to gold – they are valuable only because they are rare and in demand for use in high end electronics, clean energy and defence applications. Other valuable industrial metals include platinum, palladium and copper, but these are considered to be more of a commodity style investment and there are no directly held alternative investments into these metals.
Speculation? There has been a lot of speculative investment into precious metals. Steep rises in the gold price make headlines in the mainstream media, drawing further investor interest – and raising concern that it is moving into bubble territory. Silver also attracts speculation from more adventurous investors and a smaller minority of investors have also tried to speculate on the price of diamonds and rare earth metals. Obviously speculation can drive prices higher, but it also highlights the key issue with these assets – it is very difficult to know when they are over-valued and a sudden change in sentiment towards them could lead to steep price falls. Of course these assets do not provide any income.
PROPERTY
Property is of course the best known alternative investment and is now so widely used as a diversifier in traditional portfolios that perhaps today it is more mainstream than ‘alternative’. Of course, many investors are familiar with the idea of property as investment as they already have purchased their own homes and the property market receives a lot of coverage in the UK. The residential buy-to-let markets and commercial property in particular are well established; more alternative property investments would include care homes, hotel rooms, student accommodation, self-storage and car parks.
Diversification Real estate allows investors to spread some of the risk in a balanced portfolio over the long term, mainly because the returns from real estate have a low correlation with those from equities, bonds and other com Stability of Income Income from real estate takes the form of rental yields paid by tenants. Real estate yields over the last 30 years have been consistently higher than most fixed interest securities and the dividend yield available on equities. Meanwhile, the relatively long-term nature of rental contracts can provide stability of income.