Alternative Assets: The Greatest Trend of 2012
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- Published on Tuesday, 07 February 2012 08:00
- Written by Andrew Snyder, Editorial Director, Inside Investing Daily
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The world's biggest pension funds are ditching stocks like never before. Instead of risking everything on Wall Street, they're buying a handful of little-known alternatives.
If this trend continues, investing as we now know it will be extinct in just over a decade. It's a trend that Wall Street is powerless to stop. It keeps the folks in the White House up at night. And yet ordinary investors are set to reap big benefits.
As baby boomers retire, they are doing something few experts predicted. Yes, they are jumping out of risky stocks like we knew they would do. But they are not trading their stocks for bonds.
Instead, it is all about alternatives.
The trend is especially clear when we look at the groups charged with managing baby boomer assets. A recent study by our friends at Towers Watson shows that pension fund allocations are changing in a big way.
Get this... In 2005, the average alternative asset allocation for pension funds in the top seven international markets was a mere 5%. After six years of market upheaval, though, those same funds have boosted the figure to 20%.
For U.S. pension funds, the figure is even more pronounced -- a 25% alternative allocation. It's crazy. One out of every four dollars goes to an "alternative" asset.
These days... the smart money wants anything but conventional assets.
As these big funds make the move to things like commodities, real estate and even wine, they are forced to leave traditional plays like stocks and bonds behind.
Here are some figures...
In 1995, the global average allocation was 49% equities, 40% bonds, 5% alternatives and 6% cash.
Today, the figures reflect political and economic reality -- 41% equities, 37% bonds, 20% alternatives and just 2% cash.
For the unprepared, this is a nasty trend; the world's top investors are ditching the very same stocks you're being told to buy.
Remember, these funds control over $25 trillion in global assets. A lone percentage point in allocations represents hundreds of billions of dollars.
Buying into their selling is like trying to run straight through a stampede.
First you'll get knocked down... then trampled.
The question here is obvious. If they are selling their stocks and bonds... what are they buying?
I did some digging over the past four weeks and have put my thumb on the hottest trend in the pension fund segment. Funds from Canada to Australia and even North Dakota and Alaska are pouring billions into this niche alternative market.
It's the sole focus of the next issue of Unconventional Wealth, so I can't give away all the details.
But I can give you a sneak peek:
The gold-buying craze is one of the hottest trends we have ever seen. In the span of less than four years, the shiny metal has become the epicenter of the investing world. If you're not a buyer, you're made to look like a fool.
But I'm here to show there is something better... much better.
Political risk is disgustingly high. Entire continents are on the verge of monetary implosion. And anger amongst citizens -- in every corner of the world -- is at a boiling point. From here, it is not a question of if we see a systemic meltdown... it's when.
And when reckoning day finally hits us (you know it will), the alternative asset I recommend in this issue will be the only thing that keeps your portfolio out of the fire.
The smart money is ditching traditional stocks. Think you should follow?
Editor's Note: Did you see the news last month that an old penny sold for $1.38 million? This is exactly why investors are jumping into alternative assets. The price was the highest ever paid for a United States copper coin. If you want to learn why "unconventional" assets like these are soaring, here is some more info.
We've Only Just Begun
By Ryan Cole, Editor, Small Cap Insider
The precious metals bull is only halfway through... and some of the biggest profits remain on the table.
Never mind all the talking heads, arguing back and forth about whether gold is going up or down. The truth is already out there: It's going up for the next 10 years.
How on Earth can we know this? Simple -- short-term gyrations may be unpredictable, but long-term cycles are the steadiest rhythms of the markets.
Like the tide, they move predictably. Like a wave, they are unstoppable. Think of them as the economy's breath.
And we're in the middle of a secular bull cycle in precious metals. These cycles last about 25 years, on average -- 20 years on the short end. And the current one started in 2000, as pegged by Jim Rogers (and the price of gold).
Within that cycle, there will be smaller booms and busts -- and that's where the talking heads play their game, guessing where gold (and silver, palladium, et al.) will be in four months, six months, a year.
Think of it this way... CNBC can't lead off a show segment with "Day 4,000 of the secular precious metals bull," but it can grab attention examining the minutia, looking for signs of a slowdown or speedup.
Who cares?
If you have the patience to wait out the smaller details... and the confidence to ignore the shrill shrieks of the financial press... you are guaranteed to make money.
Of course, the numbers back this up. When gold hits a cyclical peak, you can buy the DJIA for one or two ounces, give or take.
At the moment, with the Dow at 12,800, it would take about 7 1/2 ounces of gold to buy the index.
Unless you think the Dow is about to drop to 3,500, gold has a long way left to run.
Everything's Pointing Up
The long-term news supports a gold bull, adding further fuel to a fire that doesn't need it. With Bernanke guaranteeing interest rates will stay near zero until at least 2014... with the U.S. and Europe printing money to paper over their debts... and with demand for gold skyrocketing in emerging markets... we've got a perfect storm.
Low interest rates reduce the appeal of cash investments. Hot printing presses create a constant threat of inflation -- great for precious metals. And the biggest gold market in the world -- India -- is fast becoming the most rapidly growing economy in the world.
In short, everything points to a run-up for gold over the next few years.
But we can do better than just playing the metal itself -- a lot of that money has already been made.
No, the best way to capture the move up in gold and other precious metals isn't to own the physical stuff -- but to own the companies digging it up.
More specifically, you want to own small junior miners that see a major increase in profitability for every small inch forward in gold's spot price.
They capture more of gold's moves because the cost of mining gold is fairly static -- bouncing around between $500 and $700 an ounce, depending on a variety of factors. But everything above that becomes exponentially more profitable.
Today, gold is just under $1,725 an ounce -- giving most miners a profit of $1,000 an ounce. If gold goes up to $2,000, that's only a 14% rise... but for miners, profits will go up 25%, to $1,250.
It's called gearing -- and it's why you'll make great money owning the metal in the first half a bull... but you need to own miners to keep up the pace in the second half.
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