Beware the Alternatives!

While skimming the pages of a national newspaper recently, I came across an interesting article explaining the current rush of investors to buy woodlands - more for pleasure than to exploit any commercial potential.

Now, we know the global economic crisis has been knocking investor confidence, but it does strike me as a little barmy that, particularly in this climate, people are pouring money into weird and wonderful exploits rather than using sound investment models.

Worryingly, there now appears to be a strong move towards all sorts of alternative products and fund solutions which could undermine confidence in more reliable, traditional models.

Modern portfolio theory is, at one level, quite simple. An investment portfolio should be made up of a range of non-correlated asset classes, based on an analysis of the past performance of each asset class.

This isn't an exact science, and there is debate about how much ought to be held in each asset class, but these models deliver a medium to long term strategic solution. Ultimately, any short term fall in the market should be overcome by remaining in the market longer term.

The alternative products and fund solutions being favoured at the moment range from those investing in woodland or property in developing economic countries, through to protected products offering to return capital at the end of a fixed term. The brochures are glossy, boast attractive headline rates, and promise to deliver beyond traditional investment strategies.

These strategies can be pretty obscure and complex, and although they may be acceptable for the right type of client, it's clear they aren't going to suit the faint-hearted investor. An effective risk-profiling system, allowing for multiple risk profiles across different aspects of a client's portfolio, should be at the heart of every adviser's toolbox.

Some clients may have concerns about traditional investment models, but shouldn't these same clients have a similar level of concern about the exotic schemes that rely on great marketing above proven track-records?

In order to fully understand these new alternative investment solutions advisers need to look 'under the bonnet' and beyond the marketing hype. Rather than concerning ourselves solely with the future of capital markets, we need to be far more aware of the dangers associated with the hood-winking promotional strategies used by the companies offering these alternative investments.

In these difficult times the theory of capital markets, not just modern portfolios, is being seriously challenged. But this doesn't mean that we should be redirecting our investment focus by building and developing new investment strategies.

Alternative investment solutions can have their part to play and there have been some successes where the alternative strategy is part of a client's 'satellite' portfolio solution.

But, ultimately, clients need to be educated to understand their fear, quantify it and, with the help of a professional financial adviser, find a way to invest in a manner in which they can have complete confidence and that is comfortable and affordable.

Chris Smallwood is chief executive of 2plan Wealth Management

scott.sinclair@incisivemedia.com