Today 64% of individual investors choose alternative investments

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SIMON BROWN: I’m chatting with Jonty Sacks, a partner at Jaltech. The first Jaltech Alternatives Investment Survey has just been released. Jonty, I appreciate the time today. A lot of things stood out for me, but I think at the top was that 64% of individual investors invest in alternative investments. If we had gone back a decade, it probably was 6.4%. There really has been huge growth in alternative investments over the last number of years.

JONTY SACKS: Yes, Simon. The survey was a sample from 1 300 participants. So we really have rich data. I think, to deal with your point, alternative investing is becoming more mainstream. There are more fund managers in the market that are giving investors access to unlisted investments, to more high-risk types of alternatives. I think the market needs it and the market has really been latching it up.

But something which I’d love to discuss in more detail is that information around it is one of the biggest hindrances into people actually investing. They don’t know whom to invest with, what information to receive. One of the reasons for lack of investment is also around financial advisors who aren’t familiar with the product, don’t have a licence for the product, or the company or practice they’re in hasn’t approved alternatives. So there is still significant potential for growth in this market, but there’s a lot of education needed.

SIMON BROWN: I take your point on that. Absolutely. A decade ago it was really [Section] 12J [of the Income Tax Act]. Yes, there was a bit of private equity, but that wasn’t for the average person in the street much at all. And looking at allocation, it seems to be around 1% to 10% of portfolios. That’s where the majority, 69% of investors, are allocating. To me that does seem small and it talks to your point around caution. I appreciate if you’re saying some parts of alternatives, [like] crypto, sure, keep it small; but other parts of alternatives aren’t necessarily a higher risk environment at all.

JONTY SACKS: I agree. If you look at the hedge-fund market, depending on the manager you are ultimately getting equity exposure, but potentially the risk profile isn’t really high. So investors should be potentially allocating more. Structured products are a great example. There are many structured products in the market where you get exposure to US businesses but have capital protection if the market doesn’t nose dive. So we classify alternatives as risky, but they’re not necessarily so, especially with this capital protection. My expectation is that over time people’s allocations will increase as they become more educated in these products.

But what we really do need, and we’re seeing it, is growth in the advisor space because advisors understand their clients and they understand investing. One of the things that stood out for me the most is if you look at the reasons why people invest in alternatives, [is that] individuals want higher returns, which makes sense. They’re emotional, they want to be wealthy.

But when the same question was put to financial advisors, over 90% indicated that higher returns aren’t something that they even consider with these investments. What they consider important is diversification, and that it’s uncorrelated to traditional markets. And that’s the type of thinking investors should actually have. So if advisors were more educated on alternatives, I think we’d see a much larger portion of the market investing, because they need that sounding board and we’d see much quicker growth in this space. But I think we are moving in the right direction, for sure.

SIMON BROWN: I think we are, and to your point that was exactly what stood out to me. Investors want the higher returns. And sure, again, there are sectors within alternative investments. Heck, there are sectors within the JSE where your risk/reward is higher. But that’s not always the sole [reason]. It is around different asset classes. It’s around sort of diversification, uncorrelated. One of the things I really like about alternatives is that often they are unlisted. So I don’t get that minute-by-minute sort of ‘you’re making money’ or ‘you’re losing money’ type of volatility.

JONTY SACKS: Yes. One would need to point to the crypto market. Our business is in that space and what we see is that when the markets crash we get lots of investors. When the market goes up we get lots of investors. And in between we get people who are making knee-jerk reactions. It’s an emotional game for investors who aren’t going through financial advisors. They’re managing their own money.

So to your point I can’t agree with you more. If investors would just take the high off returns, the numbers on a daily basis, they’d probably be invested for longer and experience much higher returns because, as time goes by, potentially your returns would be better if you stick to things. But this is an emotional game for many.

SIMON BROWN: Absolutely. I want to end off on advisors. You talk around the important role that they play. They know their clients, they can sort of talk us off the ledge when we are getting scared or nervous or something like that. I’m assuming that’s a big part of growing this industry. Product is important, but [it’s] speaking to advisors and getting them on board and understanding where and how alternatives fit.

JONTY SACKS: Definitely. What we’ve experienced is it’s all about education. If you can really articulate and explain an investment to an advisor, they can get their head around it and then they can decide which clients to take this to. So alternatives are not for everyone. If you are very senior in age and you’ve got enough capital to see you through, I think you shouldn’t be considering alternatives.

If you are younger you definitely can take a bit more risk. The return potential could have a significant impact on your future. If you are losing 1% to 3% of your portfolio based on an investment that goes south when you’re young, that’s fine. That’s the nature of investing, that’s the nature of the risk you can take being young.

But education is key. And what we are seeing from the survey is that, of people who aren’t investing, over 50% said the reason they haven’t invested is because they don’t know where to access information on alternative investments. Those are the type of people that should be engaging a financial advisor, learning what options there are in the market, seeing what’s right for their portfolio – and investing or not.

SIMON BROWN: Yes, and making informed decisions. I take your point, it’s the unknown and then they stay away. Jonty Sacks, partner at Jaltech, I appreciate your time.

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