Investing in Plan “B”

Published on 8th May 2007

The ongoing market correction in the Nairobi Stock Exchange (NSE) has seen almost all the counters losing considerably. For many, mainly institutional investors, this has presented a great opportunity to buy more shares at reduced prices. Other investors have been contemplating alternative investment opportunities to mitigate such downward stock market adjustments.

 

Recent IPOs in the NSE have attracted many investors leading to oversubscriptions. This not only exhibits the enormous amounts of money flowing in the Kenyan economy but also the big investment spirit in an average Kenyan that yearns to be tapped to create wealth. What’s missing is a viable investment alternative. Previously, having a solid stocks portfolio or mutual fund line-up was enough, but this has changed with the changing market conditions thus increasing demand to diversify into non stock options.

 

Alternative investments do not involve stocks and bonds. They are an alternative to the volatility of the market and present an opportunity to have a greater return when the market is on the down turn. They do not have a direct connection to the securities markets and the investor does not have as much risk. Banks, Brokers and other financial/investment institutions ought to widen alternative investment products to keep up with their customer‘s demands for a diversified range of investment products.

 

The Alternatives

 

The major alternative investment is in real estate. This can be done by buying homes and selling them at a higher price. This works particularly well if you buy (or pool with like minded investors to buy) a house at a rock bottom price. Do some alterations on it and sell it at a tidy profit. Again, this does not happen overnight. It should be taken as a long term investment strategy. A careful search of the market when buying and selling is mandatory for best deals. This may entail waiting for the right opportunity to sell.

 

At the moment, the real estate market is not very vibrant. With the Kenyan government giving tax incentives to encourage home ownership; the supply has outstripped the little demand. The trick in investing in real estate is to own an assortment of assets such as real estate mutual funds, rather than having a single property in an area that is not very prime. Such property may not appreciate in value thus tying down your funds.

 

Another method of alternative investment is Venture Capitalism. This is a process of investing in a company that is starting out and is manifesting the potential to grow substantially over time. Such a firm should have potentially high rates of return over long periods of time. This usually offers investors better financial returns than stocks, but requires longer time to see any return as the new company needs time to build up its clientele and thus its profits.

 

The listing requirements by the Capital Market Authority (CMA) are a bit stringent and some very potential firms may not be able to list on the NSE. Investors can be allowed to provide capital to these firms and obtain shares into them as a form of private equity. This will see them sharing in the success of this firms as partners, with control over management, rather than just being mere investors. However, proper analysis should be done to ensure that the viability of such firms is not over rated.

 

Hedge funds are some of the most popular forms of alternative investment in developed countries, although, this is yet to pick up in developing countries. Hedge funds pool investors' money and invest it in financial institutions. They are mostly not registered and, unlike mutual funds, they seek profits in all sorts of investments that can make money, including trading in securities. Although hedge funds carry much more risk, they usually give a higher return compared to mutual funds. Introduction of this in the Kenyan market will see more people investing with our local investment firms and fund managers.

 

The Risk

 

Like any other investment, alternative investments have an element of risk associated with them. Whatever type of alternative investment one chooses, they must be aware that there is always a risk of losing money, but this risk is minimal with the possibility of large returns on your investment. Before investing in any program, investors must obtain, read and examine thoroughly its disclosure document or offering memorandum.

 

Basically, owning stocks and other alternative investments such as real estate can increase expected returns on ones portfolio and lower the risk. The debate here is not whether one should own real estate or stocks, but to spread ones investment across both. Alternative investments enable investors to diversify their portfolio.


This article has been read 1,803 times
COMMENTS