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Are alternatives getting more mainstream?

01 July 2022

Editor Jonathan Jones looks at how investors are being encouraged to move outside of traditional assets.

By Jonathan Jones,

Editor, Trustnet

When thinking about the phrase “alternative”, one might conjure up images of The Cure’s Robert Smith or R.E.M.’s Michael Stipe. While the alt-rock genre of the 1980s was an exciting time for music, the alternative investment movement of recent years has been far less entertaining.

I doubt either frontman will be releasing hit records about investing in tax-efficient vehicles such as venture capital trusts in the near future.

However, for some people it will be more important. Laura Suter, head of personal finance at AJ Bell, noted this week that based on the latest government figures on income tax, there will be a near 50% increase in the number of additional-rate taxpayers, and a 44% increase in the number of higher-rate taxpayers this tax year.

Around 5.5 million people will pay the 40% rate of income tax, while 629,000 will be paying the 45% levy.

One option that might be appealing is VCTs, which offer investors a 30% income tax break on all money invested. According to figures released by the Association of Investment Companies, venture capital trust new fundraising hit a record £1.1bn in the last tax-year as more people looked to squirrel their cash away from the hands of the taxman.

These portfolios are often very risky, buying into unlisted, early-stage businesses that are fast growing but also have a higher likelihood of failure.

However, the Link Investment Trust Dividend Report this week noted that the biggest increase in payouts among investment companies came from VCTs, with income up by £221m.

If VCTs are a bit much, investors may want to consider private equity, which also came out well in the income report. Payouts from the sector were worth £576m in 2021, the largest of any category of trust thanks to the “dominant” 3i Group.

Among other categories, renewable infrastructure funds, often involved in renewable energy generation, have also been on the rise and pay some of the largest dividends of any sector, along with traditional infrastructure.

Richard Parfect, fund manager at Momentum Global Investment Management, said the rise of “real asset” trusts, including infrastructure and property, has been one of the success stories of recent years at a time when bonds and equities have flopped.

“As inflation is finally materialising in dramatic form in the day-to-day economy (as opposed to where it has been hiding for a long time in housing and asset prices), now is probably an opportune time to assess what level of protection this new breed of investment trust is giving investors,” he said.

While there are no free lunches, perhaps those worried about falling markets and rising bond yields may be better off parking their cash in some alternatives.

And with a plethora of options to choose from, there is no excuse not to at least look at alternatives as a core part of any portfolio.

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