Beyond football and tennis? Why charities are broadening their investment horizons

Not long ago, most sports fans in the UK focused on a couple of major sports: the English Premier League and Wimbledon. Today, audiences are just as likely to follow Formula 1, the Six Nations Championship or the Ryder Cup.

The old favourites have not gone away; if anything, they’re stronger than ever. Fans, however, have broadened their horizons.

Something similar has happened in investing.

Equities and bonds remain the Premier League and Wimbledon of many charity portfolios. They help trustees balance today's spending requirements with the need to preserve purchasing power for future beneficiaries and they continue to play a role in delivering long-term growth and regular income.

Yet increasingly, investors are looking beyond these traditional assets in search of additional sources of diversification and returns.

Looking beyond the traditional leagues

Alternative investments cover a broad range of asset types that sit outside the traditional categories of listed equities and bonds. The objective is not to replace equities and bonds. Rather, it is to broaden the range of opportunities available within a portfolio.

Alternatives include assets such as infrastructure, property and commodities, including natural capital investments such as forestry. While these investments differ significantly from one another, they share common characteristics: they may offer low correlation with other assets, reducing reliance on traditional market cycles, and indirect link to inflation, improving long-term return in real terms. We believe these characteristics offer the potential to improve portfolio outcomes, although outcomes vary.

Commodities, for example, are in a league of their own. They are typically viewed as a potential hedge against short-term inflation and geopolitical uncertainty. Prices are influenced by factors such as supply and demand dynamics, weather patterns and political events, rather than corporate earnings. As a result, they may provide a different source of diversification in a portfolio.  

On the other hand, real estate and infrastructure both provide access to tangible assets that may generate income alongside the potential for capital growth. Property returns are often linked to rental income and asset values, while infrastructure assets such as utilities and renewable energy projects, can benefit from long-term contractual or regulated revenues, often indirectly linked to inflation.

Given the breadth of the alternatives league and additional complexity and/or lower liquidity that could result in additional governance burden, charities need to be selective. We believe alternatives should be integrated thoughtfully based on investment objectives, constraints and circumstances of individual charities.

Forestry: a different ball game altogether

In our view, forestry may offer portfolio diversification benefits. The value of a forestry investment is not driven solely by stock-market valuations or movements in government bond yields. Instead, returns may come from timber sales and changes in land values, while demand is driven by a range of end markets including construction, packaging, paper and biomass.  Unlike many traditional assets, trees continue to grow regardless of short-term market sentiment, giving managers flexibility over when to harvest and sell timber.

Forestry doesn’t remove investment risk: timber prices can fluctuate, land values can rise or fall, and forestry investments face their own unique challenges. Instead, what the asset class demonstrates is that some alternative investments can be influenced by economic and physical factors that are different from those driving traditional markets.

From niche to mainstream

Historically, many alternative assets were accessible primarily to large institutional investors with significant capital and specialist expertise.

Today, listed investment alternatives have opened much of the asset class to a broader range of investors. Charities can gain exposure to assets such as infrastructure, property and forestry through listed funds, investment trusts, including Real Estate Investment Trusts (REITs), and specialist companies traded on public markets.

Rather than buying the underlying assets directly, which may be less liquid, more complex and potentially less diversified, investors can access alternatives through vehicles that own or manage them on their behalf, while retaining many of the features associated with public markets, including transparency, governance oversight and liquidity.

Backing the team, not owning the stadium 

Accessing alternatives through listed markets is not the same as direct ownership.

A listed infrastructure trust or forestry company can still be influenced by broader market sentiment. As a result, share prices may not always move in line with the value of the underlying assets, particularly over shorter periods.

Yet for many investors, including charities, that can be a worthwhile trade-off. In our view, this is because listed structures tend to offer greater flexibility, lower barriers to entry and easier portfolio implementation than direct alternative investments. They can provide access to specialist asset classes while maintaining the liquidity that many charities require.

As with any investment decision, understanding the characteristics, risks and objectives of the investment remains important.

More ways to play

The growth of Formula 1, basketball and athletics has not diminished interest in football or tennis. It has simply created a richer landscape with more ways for fans to engage.

In our view, alternative investments play a similar role in portfolios. For charities, listed alternatives can potentially offer a practical way to access that broader opportunity set while balancing the liquidity and long-term considerations.

What comes next?

Having explored what alternative investments are, why investors use them and how they can be accessed, the next article in this series will focus on one of the most widely discussed areas of alternatives investing: commodities and gold.

We'll examine some of the most common misconceptions, separate myth from reality and explore the role these assets can potentially play within a diversified portfolio.

 

It should be noted that diversification is no guarantee against a loss in a declining market.