What Singaporeans need to know about alternative investments

When it comes to investments, Singaporeans have traditionally been wedded to their property market – purchasing property not just as a home, but an investment. However, with private home prices now falling for the seventh consecutive quarter – the longest losing streak in 13 years – Singaporeans are understandably looking elsewhere.

Over the years, this search has led to the rise (and fall…) of all sorts of, let's say 'creative', asset classes. From tulip bulbs, exchange-traded funds, to art, cars, and even shipping containers, it seems nothing is off-limits to the crafty investor or manager.

While Singaporeans still tend to go for local and Asian equities, collectibles, gold, and other investments make up around 23% of total investments by Singaporeans in 2014, according to Schroders.

While there are many investors who would swear by a certain asset class, if history is a guide, the likelihood is that most will crash at some point. REITs and commodity funds, for example, were doing perfectly well in the early 2000's, yet came tumbling down in the 2008 financial crisis. Gold, that normal rock of last resort as a safe-haven, fell in 2013.

How can Singaporean investors identify an alternative asset class that will provide them with the returns they need, at a suitable risk point?

In Asia, I have been covering the rise of 'passion investments' such as cars, watches, and art for some time. One of the keys to identifying which class to invest in is to look at how many collectors there are; the more collectors, the more likely that asset class will grow. China has over 20 million rare stamp collectors, and rare stamp investments continue to break records in terms of sales and prices.

Another is scarcity, which in turn generates demand and drives up value. In Singapore, water is scarce, and the city-state's ability to keep the taps running consistently and affordably is a remarkable success story.

But scarcity creates value. The contribution water companies make to Singapore's GDP has grown from S$0.5 billion in 2003 to S$1.7 billion in 2015, according to the EDB. Additionally, the expertise that these companies create is highly exportable, especially to water-scarce regions such as the Middle East and even California, suggesting further growth and returns on investment.

Singapore's Private Banks and other financial institutions offering advice and guidance on portfolio construction would normally suggest holding a mix of equities, bonds, mutual funds, and ETFs that diversify asset classes and geographical regions.

Some may advocate the diversification incorporate commodities or property in the form of REITs. The more adventurous may then suggest alternative funds such as "Luxury Brands", forestry, bamboo, or High Tech funds.

For a Singapore-based High Net Worth (HNWI) or Ultra HNWI, then some institutions will suggest an investor consider the real alternatives, such as stamps and rare coins, or an art portfolio or even a collection of classic cars, and will bring in a specialist to discuss how they can access these markets directly or through funds or other structures, explaining what the risks are and how to avoid the main pitfalls.

Old Harry Markowitz won a Nobel Prize for Economics back in 1990 advocating the use of more diversification to minimise risks. I wonder if he thought the diversification would mean wines, coins, and cars? They are certainly catching on.