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When equity markets yo-yo, the housing market grinds to a halt, banks buckle and commodities crash, it is tempting simply to bail out of everything and hold your cash in a bag under the floorboards. But if you are looking for less extreme responses to the economic crisis, there's a strong argument for diversifying a chunk of your portfolio into assets with low correlation to other beleaguered sectors.
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We have rounded up six options at different entry levels. Some are designed specifically to take advantage of weak markets, others play on enduring trends, such as global food demand or the international shift to sustainable wood sources, while others are simply less widely recognised as investment vehicles.
Of course, many alternative investments are relatively high risk, and they are not necessarily protected by Financial Services Authority regulations, so it is important to understand exactly what you are taking on before you part with your money.
LESS THAN £5,000 TO INVEST...
Rare coins
The investment market in coins is large and well-established in the US, but in the UK it is under-researched and under-promoted, according to Ian Goldbart, managing director of specialist coin dealer A H Baldwin & Sons, and adviser to the Aim-listed fund Avarae Global Coins. However, he says investors have been making enquiries recently on the back of the general flight from the stock, bond and property markets.
"Our research suggests that, over a long timescale, coins are as good an investment as most things," says Mr Goldbart. "English coins over the long term have returned 10 per cent a year. But the key is to look for the highest possible quality and rarity – very rare pieces keep their price in the face of any downturn. There is no weakening in the market at the top end."
Avarae was launched in 2006 in response to demand from several large institutional investors for an opening into a new alternative asset class, and its main shareholders still include BlackRock, Jupiter and Allianz. The fund is still only around 80 per cent invested, so these are early days. The idea, says Mr Goldbart, is to build up a "critical mass of different coin sectors, rather than unrelated valuable coins, because a good collection of a particular period or country adds value and will attract collectors at auction".
The share price has "dropped like a stone", more than halving in value during the past year as panicky shareholders have bailed out of the Aim market; but it certainly does not reflect the value of the underlying assets. This stands at around 11p per share, almost twice the share price of 5 3/4p.
Alternatively, if you'd rather remove the potential for such discrepancy between net asset value and share price by investing directly, it's possible to build a bespoke coin portfolio from £5,000.
Mr Goldbart emphasises the gulf in levels of interest, and volumes of rare coins traded, between the US and UK markets. "In the US, the rarest coins change hands for upwards of $7m and there are hundreds of pieces worth $1m-plus; in Britain the whole market totals around £50m a year. There's a lot of potential for growth, but it is a slow, plodding industry. Prices don't yoyo."
For more on investing in coins, see our free investment guide, or visit www.avarae.com.
Rare stamps
More people collect stamps than anything else on earth: the rare stamp market is underpinned by a cool 48m collectors worldwide, including 18m and rising in China alone. So, as Adrian Roose of specialist dealer Stanley Gibbons says: "the market offers a low volatility and excellent liquidity".
The market is further helped by the fact that the ageing populations of the west are increasingly rediscovering their childhood hobbies. Stanley Gibbons recruited 22,000 new collectors in 2007, compared with just 950 a decade earlier.
Against that growth in demand, very rare stamps have performed strongly in recent years. The SGS30 index, produced by Stanley Gibbons to track the value of the 30 rarest British stamps, achieved a compound 10-year return of over 13 per cent a year. But rarity is crucial: of the three million or so stamps held by the company, less than 150 are of investment grade.
Stanley Gibbons offers a portfolio service for investors with more than £5,000, though, according to Mr Roose, the average investment is around £22,000. Clients are guaranteed a minimum 25 per cent return over a five-year period, with unlimited upside available if prices rise more dramatically. The vast majority leave their precious investments in the company vaults, rather than taking them home to pore over, adds Mr Roose. There is no management or portfolio charge; Stanley Gibbons takes its cut through the dealing mark-up.
For more on investing in stamps, see our free investment guide, or visit www.stanleygibbons.co.uk
UP TO £10,000 TO INVEST...
Tropical hardwoods
A recent development is ethical forestry funds investing in the production of sustainably farmed teak and other hardwoods. Only 1 per cent of global teak production comes from commercial plantations; the rest comes from natural rainforests, but a growing number of countries are outlawing the import of unsustainably harvested wood. Most recently, the EU has proposed a ban on illegally harvested timber imports, which account for around 20 per cent of the European total.
Such initiatives have tended to boost hardwood prices: the Costa Rican National Forestry Office reported that teak prices rose 15 per cent a year between 2002 and 2006. According to Guy Conroy, managing director of sustainable forestry company Oxigen Investments, teak returns during the past 18 years have averaged almost 10 per cent a year. "They are currently topping 16 per cent because of the strong world demand for timber," he says.
Oxigen Investments uses investors' money to create hardwood plantations in Sri Lanka and Costa Rica. Teak, on an 18-year harvesting cycle, is one option, but the company also produces Agarwood, a high-value hardwood that matures in just six years.
It's a straightforward investment proposition, with sums of £10,000 upwards accepted. Investors lease their forestry investment plot, receiving 100 per cent of the net profit generated when the timber is harvested and sold on maturity. However, because the scheme is not UK-based, the tax breaks applying to UK timber are not applicable.
Contact www.oxigen-investments.com.
UP TO £50,000 TO INVEST...
UK Forestry
After peaking sharply in 1995 and falling through the late 1990s in the face of cheap imported wood, UK timber prices have been pretty steady since 2000 apart from an uncharacteristic gain of 27 per cent in the year to March 2008, reflecting the wider commodities run. But Richard Crosby Dawson, managing director of Forestry Investment Management (FIM), believes that the long term timber trend is up. "UK timber prices are still around 12 per cent below the average of the 1990s in real terms. Yet consumption in the new economies is rising rapidly," he says.
You will need £500,000-plus to buy your own plantation, but pooled forestry funds are available. FIM runs a series of closed-ended unregulated collective investments, typically lasting 10 years and requiring a minimum £25,000. Do not get too excited: total net returns of 4-5 per cent have been par for the course in recent years, says Mr Crosby Dawson. "It's for people looking to preserve and build up long-term capital."
But for higher rate taxpayers, the generous tax breaks are a big attraction. There is no income tax or capital gains tax on the timber crops, and no inheritance tax to pay after the first two years of ownership. Contact www.fimltd.co.uk
UP TO £75,000 TO INVEST...
Hotel rooms
Guestinvest, the property investment company selling rooms in top-end London hotels, was a recent victim of the credit crisis after funding was withdrawn by HBOS (see Investors rue collapse of GuestInvest). But the hotel room sector is alive and well, with budget business hotels in particular doing well, as companies tighten their belts against the economic downturn.
"Just look at Whitbread's recent results to see what the Premier Inn chain is doing for their profits – up 24 per cent in the last six months," says Stuart Law, managing director of property investment company Assetz. He sees reliable quality and service, plus value for money, as the way forward for hotels in the coming more difficult times.
Mr Law points out that canny property investors are taking advantage of the downturn to diversify, and many are looking particularly for income-yielding investments. To that end, Assetz has teamed up with a specialist hotel contractor in Preston, to launch the first budget hotel room investment proposition.
Why Preston? "The city centre is severely lacking in quality and affordable hotel accommodation, and with a £700m regeneration programme under way, the need for accommodation in the city is set to grow even further," says Mr Law.
The hotel will be completed in November 2009; 90 hotel rooms are available for investors to buy, at prices ranging from £63,000 to £79,000. A net yield of 8 per cent is guaranteed for the first three years. The rooms will cost from £25 per night, substantially undercutting other alternatives in the city. One big attraction is that they can be held within a self-invested personal pension.
UP TO £500,000 TO INVEST...
UK land
There is a finite supply of British agricultural land; the commodities boom helped boost demand for farmland, both from existing farmers and newcomers. Danish and Irish buyers were much in evidence, buying because, despite recent price rises, farms in the UK remained cheap compared with those of Denmark or Ireland.
For the 12 months to the end of September, Knight Frank reports average price increases of 27 per cent. But Andrew Shirley, head of rural property research, reports that prices have been falling in recent months and that the coming 12 months will see price decreases averaging 5-10 per cent, reflecting the fall in land values generally and in commodity prices.
"The fundamentals of food production are still good in the long term, however," he adds. "There are still low volumes of land available, and UK prices remain relatively low compared with other countries." He suggests that the present time offers good opportunities for new entrants into the market, as the commodities' fall-off means farmers are not buying. Expect to pay £4,500 to £5,500 per acre for good commercial cereal land. Serious players looking for economies of scale buy big blocks of land, but a 100-acre holding could be rented to local farmers, says Mr Shirley.
Farmland qualifies for agricultural property relief, so there is no inheritance tax liability after two years, providing you farm the land yourself or take some farm-based risk (for example, a contract farming arrangement based on shared profit).
Mr Shirley says that land with development potential is a particular snip at present. "Housebuilders will not be interested in it, and you might well pick up a distressed sale which can be farmed in the meantime."
He highlights, in particular, land with planning permission for high-density housing, which "was going for £1 million per acre but is half that now". Alternatively, look for land in the right location with potential for planning permission, which, he suggests, could cost £15,000-£20,000 per acre. "The vendor will take a share in the value of the uplift once planning permission is in place, but again, this is a good time to find distressed sales."
Contact: www.knightfrank.com
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-IC-1.9.0c-prod - 15/05/2009 11:00:33 - stuart.turner
