- Bridging loans outpace other alternative investments with a 10.8% annual return
- Volatility also favoured by bridging with a full two percentage points between bridging loans and fine art
Investments in privately-funded bridging loans have generated the best return among a key group of alternative asset classes in 2013, according to the latest research from lender West One Loans.
Private investors in short-term secured loans will have made a total annual return of 10.8% over the course of 2013. This compares to 5.1% for fine art, 1% for fine wine, and a loss of 29% for gold.
Those who placed a £500,000 investment in bridging on 1 November 2012 would have made returns of £53,800 – more than double returns from the same investment in fine art (£25,500), fine wine (£5,100), or the £144,900 loss incurred from making the same investment in gold.
Mark Abrahams, director at West One Loans, comments, “Bonds are still offering feeble yields, while the equity markets haven’t shown the rally some were hoping for. And while the UK recovery feels solid, global growth has been marked down again. Meanwhile, many mainstream investments will be adversely affected for years to come as the world is weaned off artificial financial support.
“In that context, private investors are looking at alternatives. And while fun investments like wine and art can serve as a partial replacement for lucrative mainstream investments, they do not currently offer the stability – or the potential returns – that investments in real business projects can provide.
“Bridging loans offer the chance to invest in some of the most profitable assets in today’s economy – small businesses and property. Small, credit-worthy businesses are the leading edge of our economic recovery, so investing in their future is a recipe for a good return. But by combining such targeted investments with the security of property, ambitious returns are achievable without significant risk to capital.”
Volatility by Alternative Asset Class
Comparing the same asset classes by volatility, bridging loans also come out on top, with a three month standard deviation of 0.1%.
Gold and fine wine currently see roughly the same price volatility, at 3.1% and 2.8% respectively, while art follows closely with a three month standard deviation of 2.1%.
Financial intermediaries are increasingly turning to alternative investments in response to the current economic climate.
In a recent West One Loans survey, 30% of brokers said that they decided to offer bridging finance as a means of increasing the range of alternatives on offer to their clients. Meanwhile nearly 30% of brokers offer bridging finance because the financial climate has forced them to diversify.
Mark Abrahams continues, “With the transition to normal economic conditions fraught with complications, no asset class is immune to a world of imperfect information and sometimes wild reverses of fortune.
“Sophisticated investors want exposure to a decent return, but they also want a diverse portfolio that works to minimise volatility. We know this is a key concern for fund managers – according to a recent survey from Barings, two thirds of fund managers are concerned about volatility in today’s market .”
Background on the Bridging Industry
Bridging loans – or short-term secured loans – provide businesses and individuals with loans up to the value of £10 million for anywhere between one month and one year.
The latest West One Bridging Index saw industry gross bridging lending reach £1.93 billion in the twelve months to 1st November. This is up 5.5% since standing at £1.83 billion only two months before.
On an annual basis, this brings growth to 29% compared to the previous twelve months to November 2012, when gross bridging lending was £1.49 billion.
Duncan Kreeger, director at West One Loans, comments: “Bridging loans provide crucial support for credit-worthy borrowers and great ideas. In a warming economic climate, that support is vital for growth.
“Bridging has grown up over the course of the recession – just as most mainstream lenders have wandered into troubled waters. Now that the economy is picking up, all forms of alternative finance are steaming ahead – and bridging in particular is making the most of the competitive advantage won in the dark days of recession.”