By: Benedict Mongalo, Managing Director of Novare Impact Investment Partners
When you think of investing, the first thing that comes to mind is your traditional asset classes. However, more and more investors are shifting the balance of their portfolios into innovative alternatives, in search of a more diverse asset mix, lower volatility, and better, more predictable returns. Because alternatives are not positively correlated to traditional asset classes, they are often able to move in a different directions owing to a wider range of strategies at their disposal to respond to changing market conditions.
This makes them an invaluable addition to any modern investor’s portfolio.
Alternative vs Traditional Classes
Traditional asset classes such as stocks and bonds, or even interest on cash savings, simply don’t require the specialised level of experience and knowledge that alternatives demand. They are even available through passive strategies such as exchange traded funds (ETFs), which require little to no investment expertise. Conversely, alternative asset classes are varied and demand diverse fund management teams with an operational capacity for ongoing research and due diligence, spanning both private and public markets, with a wide range of strategies and specialised functions in the mix.
On the private side, alternatives may include private equity investments such as growth or venture capital, even infrastructure, and private credit outside of traditional banking structures, which may include senior debt, hybrid, and mezzanine debt propositions. There are real estate investments which seek to make returns via both capital appreciation and ongoing rental, as well as a wide range of commodities and collectibles, such as art, for example.
On the other hand, there are alternatives such as hedge funds and structured products which invest predominantly in instruments listed in the public market.
Alternative classes often lend themselves towards longer investment terms than traditional classes and do not offer the same liquidity. Outside of hedge funds, they are not as easily sold or converted back into cash. They also tend to be more expensive relative to traditional asset classes, principally because of the level of management that is required to successfully research, set up, and operate these funds. However, the significant proportion of fees are usually performance fees or carried interest, which only become payable if the fund has met its performance hurdle thresholds. This means that you only really pay for what you get in return.
The unique opportunity for impact
Additionally, alternatives offer a unique opportunity to deliver impact investments. These are investments made with the intention of generating significant social and environmental impact. They look towards total value creation for all stakeholders including investors, the communities, and the planet at large.
Recent studies have shown significant inflows towards funds with a focus on impact. So, it is a smart move on all fronts, achieving the highest possible returns at the lowest level of risk, while also doing a whole lot of good.
In South Africa, impact funds have the potential to unlock economic growth and employment opportunities, while supporting the establishment of greener, more sustainable, and resilient communities across the country.
Creating lasting impact in communities
With real estate investment funds, property development is a key driver for socio-economic growth, community engagement, and social upliftment. Properties eventually become enablers for other businesses to develop, grow, and thrive. The fund plays a key role in developing various supply chains, building skills and capacity, as well as creating and supporting new businesses which are less susceptible to changing environmental and economic shifts.
Other key sectors that are ripe for domestic impact funds include the high labour absorbing sectors of agriculture and manufacturing, as well as economic infrastructure assets like renewable energy, transport, water, and ICT, amongst others.
Impact funds offer the rare opportunity for the investor to do good, feel good, and make good on their money, all at the same time. These kinds of investments can play an active role in economic recovery and growth in both the short and long-term after Covid-19.
Ultimately, alternatives can do as much to minimise investment downside risks as they can to uplift the world around them.
