Don’t bag SWAG

When the fund management sector creates a new acronym for a series of investments, investors should tread very carefully.

Attempts to bring CIVETS and MINT funds into the mainstream, following the relative popularity of BRIC funds, were largely unsuccessful. They were fun to talk about at the time, but little more.

The latest investment acronym comes courtesy of Joe Roseman, formerly of Moore Capital, who is encouraging investors to ‘bag some SWAG’.

SWAG describes silver, wine, art and gold; the alternative investment assets that Roseman believes should be held by investors over the next decade.

He points out that all four asset classes have outperformed equities and corporate bonds over the past decade. Roseman believes they would do well in a period of ‘stagflation’, should we experience no economic growth but high levels of price inflation.

It’s a good story.

Investors are right to have some concerns about a period of higher price inflation and lower economic growth, as a result of current monetary policy from central banks in developed markets.

It is difficult to see how banks can effectively print money without this pushing up prices over the longer term. Here in the UK, we seem to have largely avoided this negative impact of QE in the short term, as imported inflation from global commodity prices has fallen in the short term, softening the blow.

Despite this grim economic outlook, investors should not be rushing to ‘bag some SWAG’ and add these alternatives to their portfolios.

The risks associated with alternative investments can be significant.

In addition to our view that all four assets are currently trading at inflated values, after a decade of relative outperformance, they are often difficult to purchase, hold and sell within investment portfolios.

Unless you have expert knowledge of these illiquid assets (and yes, that includes wine from an investment rather than consumption perspective!), you risk buying grossly overvalued investments, with high trading and storage costs.

The reality of these dangers often only sinks in when you try to sell the alternative assets to recoup the profit you have seen on paper.

If these were not good enough reasons, it is worth remembering that silver, wine, art and gold are all non-income producing assets, so any investment returns can only come from capital appreciation.

Getting access to these alternatives will usually involve an unregulated investment structure, depriving the investor of the various protections afforded to them by financial services regulation, including the Financial Services Compensation Scheme should things go badly wrong.

We take the view that there can be a place for alternative investments within a very large investment portfolio, as long as they only make up a small part of the total allocation and the investor has a great deal of experience investing in the chosen assets.

For most retail investors, bagging some SWAG would be a very bad idea indeed.

Photo credit: Eric Rice