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What do commodities, infrastructure, and fine art have in common?

Self-managed super fund (SMSF) investors are increasingly seeking sources of return that are uncorrelated with the main asset classes of equities, property, fixed interest and cash. This helps them smooth out market cycles and protects their assets from the impact of volatile markets.




Self-managed super fund (SMSF) investors are increasingly seeking sources of return that are uncorrelated with the main asset classes of equities, property, fixed interest and cash. This helps them smooth out market cycles and protects their assets from the impact of volatile markets. 

One way to do this is to allocate a portion of the fund’s resources to alternative investments. Alternatives are a broad basket of assets that include managed futures, hedge funds and private equity investments, as well as many other assets. Here, we explore some alternative investment options for SMSF investors. 

Low-cost access to alternatives


Ilan Israelstam, head of strategy, BetaShares explains exchange-traded funds are one way to achieve cost-effective access to alternative investments.  

“One of the primary benefits of ETFs is their ability to provide access to otherwise hard-to-find investment classes and strategies,” says Israelstam. 

“A particularly striking example of this is ETFs providing access to alternative investments. For example, one of the largest areas of alternative investments is commodities, which can provide good diversification benefits to portfolios,” he says. 

According to Israelstam, it was previously very difficult for SMSF investors to access commodities before the advent of ETFs.

“Investors seeking such exposure would have typically invested in futures, which are administratively burdensome and require high minimum investment,” he explains. 

Alternatively, investors might have attempted to buy the commodity directly, generating high storage and other costs. 

Commodity ETFs, by contrast, provide investors with exposure to the price of commodities as simply as buying any share on the ASX. 

For example, with ASX: DMKT, investors get access to over 80 global growth opportunities including agriculture commodities like wheat or soy beans. 

While commodities offer an interesting way of diversifying returns, it’s also important to understand the intricacies of investing in this asset class. 

For instance, virtually all commodities are priced in US dollars, so investors should be aware of the currency impact on their investment performance. 

“With continued innovation in ETFs, a number of products have been launched that are currency hedged, so investors are getting a more pure commodity performance and are not exposed to foreign exchange fluctuations,” says Israelstam. 

“This is particularly important as historically, commodities have risen in price at the same time the Australian dollar has appreciated relative to the US dollar, which can mean rises in commodity prices can be offset by declines in the US dollar without such a hedge in place,” he adds.

Infrastructure an alternative

Another way to achieve exposure to the alternative asset class is through an exposure to infrastructure.

This includes a wide variety of different assets including ports, rail and airports, as well as social infrastructure such as hospitals and schools.

Infrastructure offers attractive, consistent returns through market cycles because these assets provide essential services. Many investments in this class are monopolistic, so they don’t face the same competitive pressures as other assets.

Importantly, infrastructure assets can offer SMSF investors the opportunity to access consistent, long-term returns as revenues are often supported by government contracts. 

Income from these assets may be indexed to inflation, which can help assets maintain their value.

Infrastructure is thought of as a defensive asset class. While there are opportunities to invest in both listed and unlisted infrastructure funds, the latter is a particularly important diversifier for SMSFs that are heavily tilted to listed assets. 

Other options

There are also lots of other interesting alternative assets SMSF investors can consider, including fine art, wine and even vehicles. But there are strict rules about how these assets can be held. 

For instance, fund members cannot use the assets for their own purposes, they must be properly stored and valued and related parties must also not use them. These assets also may not produce a regular income, and therefore be unsuitable for supporting an SMSF member’s income needs in retirement.

Nevertheless, they may be suitable for fund members who have particular expertise in this area, but this will depend on the fund member’s retirement and investment goals.

There are many different alternative investments and increasingly, SMSF members are allocating a portion of their funds to this asset class. 

Like any asset, the idea is to form an investment view before apportioning funds in an SMSF.
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