Key Takeaways:
- Diversification is critical for every investment portfolio.
- No matter the asset type, it is important to maximize the benefits of these assets through prudent oversight and management.
- At Comerica, we have a deep bench of experts working side-by-side with clients investing in specialty assets.
Diversification is critical for every investment portfolio. Investors often reach for diversification within the stock market. But with the increased fluctuation of the market in recent years–due to COVID-19, supply chain issues and geopolitical instability–many investors are striving to further diversify their portfolios. They are looking at specialty asset classes. Specialty assets include a broad range of non-financial, or real assets, that operate outside of the financial markets (e.g. stock or bond markets). Some examples include real estate, interests in privately held companies, natural resource rights and more. Many investors have specialty assets in their portfolios, but few consider the performance of these assets with the same level of scrutiny as they do their securities that are publicly traded. While specialty assets offer an increased level of diversification, they also generally have added complexity and are harder to oversee and effectively manage within an investment portfolio. To help you navigate the world of specialty assets, consider these five keys:
Key 1: Investment Objectives
As with any investment, your financial goals should serve as a starting point to chart the path forward. These may include, among other considerations, expected returns, ongoing cash flow, tolerance for volatility, and the short-term and long-term ability to convert assets to cash. When it comes to specialty assets, there are a number of objectives that can be accomplished. First, specialty assets can offer a hedge against market risk. You might, for example, buy real property in a stable market to offset a high-volatility position. Or you might invest in natural resources, such as timber or minerals, as a counterweight to rising prices or to generate a desired stream of current cash flow. Second, specialty assets help you tap into unexplored markets. Cutting-edge technologies, for example, may not be accessible in the stock market. By investing in privately held companies, an investor may expand their reach into these areas of interest.
Specialty assets may require more upfront research, ongoing financial investment or subject matter expertise. They also tend to more difficult to sell than traditional investments, decreasing the liquidity of your portfolio. Many specialty assets necessitate a longer holding period than more traditional assets. Therefore, your investment time horizon is an important consideration.
While there are benefits to specialty assets, they may also impact your portfolio’s complexity and liquidity.
Aligning these factors with your investment objectives is the first step to managing specialty assets.
Key 2: Risk Management
Non-financial assets bring unique risks not found in more traditional investments such as publicly traded stocks or bonds. Tangible assets such as commodities may be vulnerable to damage, spoilage and deterioration; real estate may be vulnerable to weather disasters, structural flaws or changing market dynamics, such as increasing hybrid workplace strategies. There are a number of ways investors can manage the risks of tangible assets, including through professional warehousing and insurance coverage. As you move beyond the financial market, be sure to identify risks and offset them with the appropriate measures. Additionally, specialty assets should be reviewed and valued on a periodic basis. This ensures the assets are sound and provides you with a reasonable estimate of the ongoing value of your investment. It also allows you to monitor the capital appreciation and performance of these assets within your investment portfolio.
Recognizing the inherent risks of specialty assets, and taking appropriate steps to mitigate those risks, is a critical part of managing a portfolio with specialty assets.
Key 3: Asset Types
Not all specialty assets are equal. It’s important to weigh the pros and cons of each asset type and align them with your investment objectives, including expected returns, market conditions, cash flow generation and holding periods. Here are the three most common specialty asset types along with the benefits and challenges of each:
Real estate refers to real property of various types, including commercial and residential property, farms and ranches, or development acreage. Investment returns derive from property value gains, as well as recurring income from leases or farming income.
| Pros | Cons |
|---|---|
| Traditionally a growth asset | Property management |
| Lease income potential | Vulnerable to fire and natural disasters |
| Tax deductions | Property taxes |
Privately-held companies are companies not currently traded on the stock market. Investment returns derive from dividends paid or sale or IPO of the company.
| Pros | Cons |
|---|---|
| Significant investment upside | Illiquid |
| Access to cutting-edge companies | Company, industry and market risk |
| Early mover advantage | Access to information |
| Generally require a longer-term holding period |
Natural resources include a range of commodities such as timber, energy, metals or livestock. Investment returns often derive from a sale of the natural resource.
| Pros | Cons |
|---|---|
| Intrinsic value |
Pricing volatility |
| Hedge against inflation | Environmental |
| Low stock correlation | Political and regulatory risks |
| Cash flow |
No matter the asset type, it is important to maximize the benefits of these assets through prudent oversight and management.
If assets are not performing appropriately as investments of your account, find alternatives that will provide best outcomes.
Key 4: Acquiring Specialty Assets
Once you’ve settled on the right specialty asset class(es), the next step is selecting the optimal specific investments. It’s time to shop around. At this stage, it’s important to note your investment time horizon. And, unlike the stock market, acquiring specialty assets may include valuation, negotiation, and partnering with a broker. Let’s look at the acquisition process for common specialty asset types:
Real estate acquisition typically starts with research and a property search. Investors identify critical details, such as where they want to purchase – general geography and then specific locations– the amount of their investment, property size, property type and more. This process may take weeks or months, depending on the market conditions and competitor offers. Many investors choose to partner with a real estate broker and mortgage company to identify, negotiate and finance the property investment.
Shares of privately-held companies are purchased through smaller, less formal channels. Some investors identify companies through personal contacts, while others leverage brokers or an emerging category of online platforms. Depending on the size of the investment and the extent of due diligence, the purchase process can take from a few days to several weeks. Investors review financial statements and projections, negotiate valuation, meet with the founding team, and more.
Natural resource investors with a high level of domain knowledge may choose to buy resources directly, taking on the burden of storage costs and maintenance. This process typically requires working with a broker or reaching out directly to resource partners. Alternatively, commodity ETFs offer a streamlined way to purchase natural resources. There are a range of commodity ETFs available in the market, helping investors access commodities without the need to manage day-to-day commitments.
The process to obtain specialty assets generally takes longer than stock market transactions, so be mindful of your investment timeline.
Key 5: Engaging a Specialty Asset Manager
Recognizing the complexity of acquiring and overseeing non-financial investments, many investors choose to work with a specialty asset manager. Specialty asset managers, like the experts at Comerica, bring years of experience operating in the specialty asset markets. Our team offers advice on how to recognize opportunities, coordinate investment and sale, bring in third parties, protect against unforeseen risk and more. To determine whether a specialty asset manager is the right partner for you, consider these questions:
- What are my specialty asset investment objectives?
- What level of domain knowledge do I have in the specialty asset category?
- Are there potential risks or downsides I may not know about?
- Would I benefit from support in identifying, acquiring, and protecting my specialty assets?
Conclusion
Specialty assets are gaining in popularity. As a means to diversify your portfolio, specialty assets offer a number of benefits, including hedging and access to untapped markets. However, it’s important to consider the added complexity of nonfinancial investments and to balance complex asset management with risks. If you’re in the market for specialty assets or are seeking support to manage specialty assets you already own, the right partner can help. At Comerica, we have a deep bench of experts working side-by-side with clients investing in specialty assets. We help identify, source, invest and protect your specialty asset investments. Contact your Comerica Relationship Manager or request to speak with a Comerica professional today.
NOTE: IMPORTANT INFORMATION
Comerica Trust is a unit of Comerica Wealth Management which consists of various divisions and affiliates of Comerica Incorporated, including Comerica Bank, Comerica Bank & Trust, N.A. and Comerica Insurance Services, Inc. and its affiliated insurance agencies. Strategic alliance organizations of Comerica Bank & Trust, N.A. are neither subsidiaries nor affiliates of Comerica Incorporated or Comerica Bank & Trust, N.A. Securities and other non-deposit investment products are not insured by the FDIC; are not deposits or other obligations of or guaranteed by Comerica Bank or any of its affiliates; and are subject to investment risks, including possible loss of principal invested. Comerica and its affiliates do not provide tax or legal advice. Please consult with your tax and legal advisors regarding your specific situation.
This is not a complete analysis of every material fact regarding any company, industry or security. The information and materials herein have been obtained from sources we consider to be reliable, but Comerica Wealth Management does not warrant, or guarantee, its completeness or accuracy. Materials prepared by Comerica Wealth Management personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Comerica Wealth Management, including investment banking personnel.
The views expressed are those of the author at the time of writing and are subject to change without notice. We do not assume any liability for losses that may result from the reliance by any person upon any such information or opinions. This material has been distributed for general educational/informational purposes only and should not be considered as investment advice or a recommendation for any particular security, strategy or investment product, or as personalized investment advice.
