How to find quality

“The individual investor should act consistently as an investor and not as a speculator” – Benjamin Graham, author of The Intelligent Investor

With all the turmoil currently experienced in public equity and bond markets, many investors are questioning whether or not they should be adjusting their investment strategy in response to macroeconomic and market stresses, whether that be reconsidering their asset allocation decisions or changing from a risk-on to a risk-off approach.

This often leads to erratic investment decisions, prompting investors to sell low (selling assets in a downturn where values are rapidly depreciating) and later buy high (re-investing into capital appreciation assets when the market is booming again and asset prices are at a high).

Alternative asset investing offers a different approach. One factor that becomes particularly important in times of market distress is the quality of the underlying investments in a portfolio. This is a consideration that is core to alternative asset investing, primarily due to the long-term investment horizons, which typically range from 3-10 years, and their low liquidity. As a result, extensive due diligence is required from the outset to ensure the long-term viability and success of an investment opportunity, with a focus placed on assessing its long-term fundamentals rather than taking short-term speculative bets. This approach becomes particularly critical in times of market turmoil when volatility and potential fundamental risks are heightened.

There are several key factors investors should consider before making an investment decision:

• Research and analysis of the current macroeconomic fundamentals i.e. assessment of the factors that are likely to contribute positively to the investment thesis. This includes looking. GDP, population growth, inflation, interest rates, unemployment rate, consumer confidence, etc).
• Assessment of the key risk factors that would negatively impact the value of an asset or a business such as regulatory risks, competition, political, climate, financial risks and others.
• Asset due diligence is one of the main areas that require attention. Focus on understanding the drivers of target returns by reviewing financial models and challenging the key assumptions that are included in these models.
• Operational and legal due diligence is often at risk of being overlooked and is generally less understood as it requires specialist knowledge. Often a specialist advisory team would be involved in doing this type of assessment where an independent report is produced highlighting any key concerns.

These are some of the key areas to consider when assessing the quality of an alternative asset investment. The rigorous investment approach suggested highlights how crucial it is to focus on the quality of an investment, particularly during economic and market downturns. WAM Alternative Assets (ASX: WMA) is a listed investment company that seeks to democratise alternative assets for retail investors, giving retail investors exposure to some of the best investment managers in the industry and high-quality assets that perform through all market cycles.

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WAM Alternative Assets provides retail investors with exposure to a portfolio of real assets, private equity and real estate. The company aims to expand into new asset classes such as private debt and infrastructure. For further information, please visit their website.