Alternative investment ideas are attracting a surge of investors seeking diversification and reduced volatility.

www.youtube.com/watch?v=0o5C5zNnG5k

Alternatives for interesting times. The last 18-24 months have been wild ones on Wall Street, and the volatility has motivated some sophisticated investors to look into non-correlated or indirectly correlated asset classes. With the rise in oil and gas prices, high net worth investors are naturally examining the potential of alternative investment programs, especially in the energy sector.

Sunny forecast for energy firms. The world appetite for energy – especially clean energy – is surging. Analysts project that global energy needs will be 50% higher in 2030 than now, with the economies of China and India spurring 45% of the increase.¹ Therefore, some economists and Wall Street analysts have become quite bullish about the long-term outlook for energy investments.

In recent years, accredited investors seeking greater portfolio diversity have begun to direct some of their investable assets into energy programs, oil and gas equipment leases, and private REITs focusing on the energy sector. Additionally, other investors are moving assets into ETFs and mutual funds focused on energy firms.

What was once “exotic” now seems fundamental. Direct energy investments represent just a slice of the alternative investment world. Commodities, managed futures, tax credits, real estate securities, real estate exchanges, annuities, even collectibles … there are all kinds of investment vehicles apart from Wall Street. While many people historically dismissed some of them as too exotic or speculative for their portfolios, that opinion has changed as investors have become more educated about their potential.

Let’s look at these intriguing numbers. As any financial advisor wisely notes, past performance is no guarantee of future results. But just for a moment, let’s compare a couple of blue chip indices with a couple of commodity indices.

Over the last three years ending April 25, the S&P 500 returned nearly 21%, and the DJIA about 27%. Across the same 3-year period, the S&P GSCI Commodity Index went up 57%. It also posted a year-over-year gain of 22% for the 12 months ending April 25, 2008. The Dow Jones-AIG Commodity Index returned about 27% in that same 12-month stretch. Did the blue chips do this well in the last 12 months?²

Interesting options for sophisticated investors. To make some of these investments, you do need to be an “accredited investor”. That is a category of investor defined by the Securities and Exchange Commission. In general terms, the SEC defines an accredited investor as

• an organization, partnership, corporation, business, or trust with $5 million or more in assets
• an individual or couple with a net worth of $1 million or more or stable annual income of $200,000 or more ($300,000 for a couple).³

As the value of these investments can fluctuate notably, they are not usually suited for the risk-averse retiree or the middle-class investor. But if you are a high net worth investor in search of diversification, they may be for you.

To learn more about how an investment in energy or other alternatives can help you hedge rising costs or add balance to volatile stock portfolios, please speak with a qualified financial advisor familiar with these kinds of investments today.

Why emerging market equities have the world’s attention.

www.youtube.com/watch?v=eXlXhPNJ9ZE

Brazil. Russia. India. China. These four nations have some of the fastest-growing economies on earth and are becoming drivers in the world economy. In the coming decades, they may command as much attention as the U.S., Japan and other “heavy hitters” … or more.

The future aside, we know one thing about the BRIC nations and other emerging markets: collectively, stocks in these countries have outperformed U.S. stocks for the last 20 years.

During this past decade alone, the MSCI Emerging Markets Index brought a total return of 102.4% while the S&P 500 posted a total return of -10.0% (-24.1% before dividends). Across the 1990s, the S&P 500 produced a total return of 432.0% – pretty impressive. Yet the MSCI Emerging Markets index posted a total return of 2408.6% for that decade.^1,2

Now there is tremendous volatility … but also great potential. If U.S. stocks soar or fall, emerging markets really feel the effect. We’ve seen them recoil in the first quarter of 2010. Yet short-term slumps aside, there are compelling arguments for investing in emerging market equities as PART of a diversified portfolio. Not the entire portfolio!

Look at last year’s returns. In 2009, the benchmark index in Brazil (the Bovespa) gained 82.66%. Russia’s RTS gained 128.62%. India’s Sensex 30 advanced 81.03% and China’s Shanghai Composite rose 79.98%.³

Now let’s look at the last decade. The Dow and the S&P 500 underperformed in the 2000s compared to previous decades. How did benchmark indices in the BRIC nations do?

Are you sitting down? Brazil’s Bovespa gained 301% across the 2000s. India’s stock market gained 249%. China’s Shanghai Composite was the laggard, only rising 72% over that stretch. Russia’s RTSI gained 863% in the past decade.³

So is it B-R-I-C, or B-R-I-M-C-K? Some economists would modify BRIC to BRIMCK, arguing that Mexico and South Korea belong in this collective powerhouse. The key market indices in Mexico and South Korea respectively advanced 44.87% and 49.65% last year.³ Or course I would argue that the sever instability of the Mexican government, which has a dramatic impact on their local market, is enough to keep it out of any serious investor’s portfolio.

So is this the (corporate) opportunity of a lifetime? Wall Street bulls see wisdom in giving more and more weight to the BRICs in portfolios. They draw a line between the impressive, sustained growth of these nations to higher returns and rising demand for capital. They look at these nations and see a rapidly growing middle class and upper middle class and a corresponding rise in spending … translating to a momentous opportunity for global companies who leap into the right place at the right time … translating to great corporate profits down the line.

Of course, this vision assumes that the BRIC nations will a) keep economic policies in place that drive growth, b) avoid political and social upheaval, and c) escape the worst of global economic crises. Remember, in my opinion, what hurts our economy will hurt them 10x as hard when it reaches there.

So is there a new alliance? A decade ago, “BRIC” was simply Wall Street slang – a term coined by Goldman Sachs economist Jim O’Neill. Today, the BRIC nations appear to be heading toward some form of coalition. In recognition of their power, BRIC leaders have scheduled annual economic summits – the first one was in Russia in 2009, the 2010 summit is in Brazil. The presidents and prime ministers of these countries entered into dialogue to determine how their economies can work together and maintain their fantastic growth.

In sum, the BRIC nations are responsible for about 15% of global GDP, and about 40% of the gold and hard currency reserves on earth are in their possession.⁴

So, does the BRIC demand your attention? Some financial consultants think that any well-diversified portfolio should have a toe (or a foot or a leg) in emerging markets – the gains of recent years are simply too spectacular to ignore. Others counter with the argument that past performance is no guarantee of future results, and cite the remarkable volatility that can affect the stock markets of these nations.

If you are interested in learning more, give me a call or shoot me an email and I’ll be glad to sit down and see what makes sense for you.

Citations.

¹ realclearmarkets.com/blog/Omnivest_1-4-10.pdf [1/4/10]

² cnbc.com/id/34645043 [12/31/09]

³ cnbc.com/id/34643111 [12/31/09]

⁴ nytimes.com/2009/06/17/world/europe/17bric.html?_r=1&pagewanted=print [6/17/09]