Bloomsbury Financial Planning

“Private clients often want it all – high returns, low risk, and unique access to new products and ideas,” says Tracy Maeter, director at wealth management and investment group HSBC Private Bank. “Not surprisingly, our biggest growth areas have been in non-traditional investments.”

She says the group’s Absolute Return Service has grown to more than $2bn under management, and its Sterling Reserve Bond, a tax-efficient alternative to cash, has attracted more than £1bn since it was launched a year and a half ago.

Kevin Boscher, chief investment officer at Collins Stewart Wealth Management, also finds that investors are not satisfied with simply holding traditional products. He has been including hedge funds and other alternative assets in his clients’ portfolios for a number of years.

Which investments have been capturing people’s attention recently?

Jason Butler, certified financial planner at Bloomsbury Financial Planning, says commodity funds are proving popular among high net worth investors.

“Cash, fixed interest and equities usually provide a good combination of liquidity and long-term inflation protection,” says Mr Butler. “But one scenario in which equities and bonds are not particularly effective at providing inflation protection, is that of sudden inflationary shocks, such as that which followed the October 1973 Arab-Israeli war.”

He says such spikes are often accompanied, or caused by, commodity price increases, so there are diversification benefits to be gained by the inclusion of some exposure to this asset class. He says: “During the stagflation [slow economic growth combined with rising prices] of the 1970s, commodities were the only asset class to post positive returns for UK investors.”

He says several funds have been launched in the past year which allow access to passive exposure via a diversified commodity futures index at relatively low cost. The latest fund to be launched is the Lyxor ETF Commodities CRB which is based on the Reuters CRB Index.

“In our opinion, this fund offers the most diversified exposure to global commodities for retail investors, compared with the other five alternative indices,” says Mr Butler. “It is also very low cost, with an annual total expense ratio (TER) of just 0.35 per cent per year and as it is an ETF (exchange traded fund) it suffers no stamp duty on purchase.”

The growth in the number of people wanting to invest in commodities, not surprisingly, coincides with a rebound in the price of a broad range of commodities following a depression in the 1990s. The strength of demand has generated accessible investment vehicles such as exchange traded funds.

Exchange traded funds are similar to Index Tracker Funds in that they aim to replicate the performance of a selected stock exchange index. BGI has a fund that tracks the MSCI UK index which has a TER of 0.3 per cent and Lyxor has recently launched an exchange traded fund which tracks the FTSE UK All Share index and has a TER 0.4 per cent which is lower than L&G’s but slightly higher than Fidelity.

“Anything which drives down costs is a good thing but retail funds are still far too expensive for our liking, although, as a professional manager, the funds we use have much lower annual charges,” says Mr Butler.

As the turmoil in the markets has increased, some investors have been increasing exposure to absolute return funds, such as Merrill Lynch’s UK Absolute Alpha fund, and reducing part of their equity weightings.

Absolute return funds aim to produce positive returns for investors every month, regardless of market conditions They are aimed at removing the constraints of a benchmark and allow the manager greater flexibility. Many describe themselves as “cash plus” because they aim to generate returns similar to cash, often with an additional return of 1 or 2 percentage points annually.