What’s the ‘alternative’?

As the world economy begins its healing process, investors look back and wonder: “Could I have done something differently?” “Could I have read the signs?” If it’s any consolation, probably not in a million years! Who would have ever imagined the world would slip into one of the worst recessions of the last century, where some economic giants would be no more.

And so nature’s healing process begins. Darwin’s theory continues to be as valid as ever, the financial world learns from its mistakes and what did not kill us will make us stronger.

A lesson surely learnt is that too much of a good thing is not such a good thing after all and hence “diversity”.

How can you diversify a traditional investment portfolio? After all, what is an alternative investment solution?

An alternative investment is one other than the traditional investment into the more commonly used stocks, bonds or cash.

This broad definition, however, makes it very difficult to list all the possible alternative investment strategies.

Alternative investments can range from collectibles such as antiques, jewels, art or classic cars, commodities – such as gold, oil or wheat, or even wine – and generally have a low correlation with traditional investments therefore helping to increase the diversification of an investor’s portfolio.

Diversification should span investing into different companies, corporations and governments, different geographical locations, sectors, different asset classes, currencies and so on. The more diversity is present in a portfolio, the better.

Having a portfolio of 15 different bonds might only be diversifying by bond issuer so should the situation arise where the international bond market is hit by a crisis, the entire investment portfolio may be at risk.

Investing in bonds and shares may also be considered as diversification to a certain extent, but what happens when, uncommonly, stock markets and bond markets are simultaneously hit?

Investing in both market related and non-market related, or uncorrelated, investments allows an investor to benefit from a wider range of investment opportunities and also from diverse timings in the upward and downward trends over an extended period of time.

Since locally the word investment instinctively brings to mind bonds, shares, cash or property, it is good to know that other types of investments are also available: alternative investments.

Senior life settlements are one of the many options available to investors willing to diversify their portfolio. An SLS is a type of life insurance contract whereby the Insured sells his or her unwanted policy to a third party.

The third party becomes the new owner of the life policy and is therefore committed to making premium payments until the policy’s maturity.

Through this transaction, all parties engaged in this deal are satisfied.

The individual selling his policy earns a sum of money upon sale and the third party purchaser buys the policy at a discounted rate and is guaranteed to receive the full sum insured upon maturity of the policy – therefore making a profit.

Seeing as these SLS policies are purchased by third parties at a considerable discount, financial institutions have noticed the considerable investment potential and created products that allow investment into the alternative asset class of SLS.

Virtually uncorrelated to any other asset class, these investments include numerous life insurance policies issued by various life insurance principals and therefore offer a decent amount of diversification by insurance provider also.

Non-traditional investment options are available and are worth evaluating. Just like any other business deal or purchase, an investment deal is worth shopping around for.

This article has been issued and approved by MFSP Financial Management Limited of 220 Immaculate Conception Street, Msida MSD1838 Malta. MFSP is licensed to provide investment services business by the Malta Financial Services Authority. The information contained within this article does not constitute investment advice or a solicitation for sale. Potential investors should seek financial, legal or tax advice, by a professional advisor prior to investing.