The 1% Are Looking Elsewhere For Returns

By Aaron Levitt | September 18, 2013 AAA

In the age of zero percent interest rates and volatility, the rich are turning to alternative assets as way to steadily grow wealth and produce positive returns.

These esoteric asset classes can provide a plethora of overall benefits to a portfolio. Yet they have been historically difficult to add to smaller sized investors. However, that is changing. Just as the SPDR S&P 500 (NYSE:SPY) brought cheap indexing to the masses, there are now countless ways to add these alternatives into regular retail investor portfolios. Regular Joes may just want to follow suit.

A Wide World Of Investing

Investments beyond the traditional stocks, bonds and cash are collectively known as alternative asset classes. That can be anything from fine art to hedge funds. According to market experts having a swath of these “alts” could give your investing a distinctive edge in the volatility and return department.

Those returns have been pretty juicy.

Created by London estate agent- Knight Frank- its Luxury Investment Index (KFLII) has produced stellar returns over the last decade. The index- which includes things like fancy cars, classic watches, wine and various antiquities, is up a stagger 174% over the last ten years. That bests broad world stock indexes by a wide margin.

The super-rich seem to be jumping on the opportunity to add such assets to their portfolios. Bank of America’s (NYSE: BAC) high net-worth unit U.S. Trust has seen client capital allotted towards farmland and timber acreage triple since 2010. So far, the private bank has acquired about $200 million worth of domestic farmland in the past five years. This fervor to add alts has extended to everything from bank loan funds and private equity to gold bullion and gemstones. Taken as a whole, the rich have on average between 10% and 35% of their overall portfolio now in such alternatives.

Yet, you don’t have to go out and buy a classic Shelby Cobra or a Picasso. The recent proliferation of ETFs and Wall Street’s love of these alts has given regular Joe investors tools investment strategies and asset classes that were previously either out-of-reach or required huge expenses to implement properly.

Here’s a few ways to gain some weighting towards alts.

Farmland

According to the National Council of Real Estate Investment Fiduciaries’ farmland index, farms have had a total return about 7.5% during the first half of year. The key to that return has been the combination of appreciation on land and crops plus the income from selling those crops. A top farmland pick could be Gladstone Land Corporation (NASDAQ:LAND). The company owns 14 farms which are leased back to farmers, while LAND collects a rent check. Those rents produce a juicy 8.9% monthly dividend for shareholders. Likewise, both Cresud (NASDAQ:CRESY) and Adecoagro (NASDAQ:AGRO) can be used to add international farmland exposure.

Bank Loans

When a giant corporation needs to raise capital, it can go to any investment bank and offer bonds to the investing public. Likewise, when your local neighborhood coffee shop needs to buy a new espresso machine, it can walk into a bank branch and get a loan. But for those companies in the middle-market, finding credit for expansion can be difficult. Through various private equity funds, the rich have been able to take advantage of providing this capital. However, regular Joes can invest in business development companies (BDC) and achieve similar 6 to 8% returns. The Market Vectors BDC Income ETF (NASDAQ:BIZD) tracks 27 of these firms and yields 7.34%.

Timberland

Yale University has been created with making timberland investing popular back in the early 1990’s. Since that time it has become the asset class du jour for wealthy individuals and institutional investors. For the 12 months ending June 30th, timberland gained 9.4% or the since the third quarter of 2008. But the retail investing set doesn’t have to miss out on those returns. The iShares S&P Global Timber & Forestry (NASDAQ:WOOD) can be used to access the asset class. Tracking forestry firms like Weyerhaeuser (NYSE:WY) and Rayonier (NYSE:RYN), the fund is up nearly 23% this year.

The Bottom Line

For the rich, stocks and bonds aren’t cutting it. They continue to add more alternative asset classes to their portfolios. However, you don’t have to have millions of dollars to follow their lead. Regular investors now have access to plenty of these alts either through ETFs or publically traded companies.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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