Alternative investments: Navigating in a "low return regime"

Alternative investments: Navigating in a "low return regime"

In recent years unpredictable economic and political conditions have caused worldwide uncertainty and Norway is no exception. Since the financial crisis in 2008, low interest rates and a high-priced stock market have forced many wealthy investors and their advisors to rethink their investment strategies. Several are, therefore, looking for non-traditional investments to meet the desire for a more predictable risk-adjusted return.

By 2015, the Norwegian economy was heavily affected by the oil industry crisis which caused a drag on related industries. This affected the labour market, with further slowdown of economic growth, which also led to low interest rates in Norway. In the rest of Europe, there are also low interest rates and a very expansive monetary policy, which means that traditional assets such as equities, bonds and property have been highly priced. Such conditions have created a challenging return environment, and traditional investment strategies are struggling to produce positive returns in the coming years.

As a result, wealthy Norwegians and their advisors have been increasingly looking to diversify their investment portfolios by including alternative investments such as hedge funds, infrastructure investments and private equity. Their goal is to achieve a higher return. This development has led to an increased need to re-evaluate existing asset structures, including the possible double taxation effects of the structure that could have a negative impact on returns.

Norwegians today can choose to structure their wealth in different ways. This could include direct ownership, investment companies, equity savings accounts or capital assurance. Wealthy individuals need solutions that include a broad long-term investment universe that is tax-optimized and ensures sound long-term inheritance and succession planning.

To a greater extent, smart investors have a more diversified portfolio. They typically invest in hedge funds, real estate, unlisted shares and private equity strategies which often have a better potential to generate attractive risk-adjusted returns. In fact, alternative investments have become so popular that PwC suggests that global allocation in this asset class will reach $ 13 trillion by 2020.[1]

Capital assurance solutions provide investors with the opportunity to take advantage of new investment opportunities, including those categorized as alternative investments, or non-traditional assets. So far, life assurance solutions are one of the few structures that can include a broad investment universe, and thus ensure a well-diversified investment portfolio.

Investors also benefit from deferred tax and a simplified tax reporting, as all assets are consolidated under one reporting structure. This is a good alternative to holding assets privately or in investment companies. This form of investment is particularly beneficial for those with mobile lifestyles whose assets are located in different countries. Thus they leave the cross-border and complex reporting responsibility to the assurance company. Almost two thirds (60 percent[2]) of Norwegians state that they want to move abroad. For those who move, life will be simplified because of this consolidation.

Of course, all investments, including non-traditional, involve a certain degree of risk. One of the first steps is therefore to decide whether alternative investments are appropriate for the individual client, and whether it satisfies the investor's risk and return expectations. Nevertheless, in this investment climate, alternative investments in a long-term assurance structure may be valuable to all investors wishing to improve their return and risk profile.

Written by Marjanne Olesen. 

The article was originally published in Kapital.

See the pdf of the original article here (in Norwegian). 

[1] PwC Asset Management 2020: A Brave New World 2014
[2] Randstad Work Monitor