If you are crazy about horses like I am, or art, classic cars, whiskey, stamps and diamonds why not consider them as an investment opportunity? They may provide your portfolio with diversification.
Why it is a good idea to add something different to your investment portfolio?
Ben Yearsley, investment director at the Wealth Club explains alternative investments are typically only appropriate for more sophisticated investors.
If you have an established portfolio of stocks and shares you could add some tax-efficient investments, such as VCT, EIS or SEIS. These schemes are useful if you want to diversify your portfolio in assets which may be broadly uncorrelated to stock-market investments or offer some degree of inflation proofing.
Yearsley says: “You’ve used your annual ISA allowance, probably maxed out your pension (or more likely earn too much to be allowed to contribute anything meaningful) and are now looking either to diversify into different asset classes, maybe save tax, or a combination of both. It isn’t as simple as saying alternative investments increase your returns, it’s the diversity that is key and having something that doesn’t go up and down with the stock market.”
He explains alternative investments encompass virtually everything that isn’t mainstream equities, bonds and property. Venture capital, classic cars, wine, art and forestry are the obvious areas of interest with the common characteristic being lack of liquidity.
“In other words if you are looking at investing in these areas, be prepared to invest for the long-term without having access to your money. Why would you invest then? Quite simply to give you something different to your mainstream ISA and pension portfolio. Some areas of alternative investing may continue going up in value even if stock markets are falling – there are clearly no guarantees though!
Why would UK investors look to tax efficient investment such as EIS?
Interest in EIS has been growing at great speed. They also provide capital to Britain’s entrepreneurial businesses.
Yearsley explains for UK-based investors, many of these more interesting areas (horses, classic cars, diamonds) are available with tax breaks. Another example is forestry which is a pretty boring investment but throws off tax free income, tax free growth and is inheritance tax free.
“Some of the more esoteric areas, such as classic cars, are available in the Enterprise Investment Scheme (EIS) – this gives you upfront tax relief, tax free growth and inheritance tax free status after two years. In actual fact, the EIS gives investors a huge opportunity for investing in alternative assets – from classic cars to wine to pubs and early stage technology. There have even been postage stamp ones in the past!” says Yearsley.
So what are venture capital trusts,
Venture capital trusts, VCTs, are another popular area of investment for more sophisticated investors.
According to Yearsley: “Upfront tax relief, tax free growth and tax free dividends are on offer in exchange for backing small unquoted companies. Unlike a unit or investment trust that invests in quoted companies like BP or Barclays, a VCT typically won’t share investments with other VCTs so each is fairly unique.”
Alternative investing is not for everybody. These deals will usually only be open to HNW or sophisticated investors.
These types of investments are riskier and more illiquid than other investments which means capital is at risk. Be warned they may not be covered by the Financial Services Compensation Scheme (FSCS), or indeed be regulated by the Financial Conduct Authority (FCA).
Written by London-based journalist Tanzeel Akhtar. Her work has been published in the Wall Street Journal, FT Alphaville, CNBC, Citywire, Euromoney, Interactive Investor.
Disclaimer: The content on this page does not constitute financial advice and is provided for general information purposes only. Nothing on this page should be regarded as an offer to conduct investment business or to buy/sell any investment.