Council (C) : In the current context of market volatility, what are the main advantages of alternative investments?
Michael White (MW): An alternative investment must offer an experience beyond the name. In general, alternative investments seek to be uncorrelated with traditional asset classes, meaning that their return trajectory is significantly less dependent (perhaps even completely independent) on the direction of traditional asset markets. With this in mind, alternatives can provide a diversification benefit when traditional markets are more volatile.
vs : What is the current state of demand for this type of investment vehicle?
MW: Alternative mutual funds were officially codified by Canadian regulators in early 2019. Recent statistics suggest that the average Canadian investor still has a very low allocation to alternatives (ie less than 5%). So there is a significant opportunity to expand these positions, especially when referring to various pension funds, endowments and other institutional investors who have had objectives of 50% (or more) to alternative strategies for many years.
vs : What proportion of the portfolio in alternative investments do you recommend?
MW: I believe that individual investors could target a position of 50% or more in alternative investments such as the funds that we just talked about.
Many established wealth management firms have approved targets of 25% to 30% for investors of all demographics, which is higher than the current average sales allocation. As with any investment product, the key test is suitability and alternative strategies can offer a range of result-oriented options in investors’ portfolios. The stress of perhaps wanting to “fill the bucket” quickly should be tempered by education and a thorough understanding (on the part of the advisor and the client) of the role of alternative investments in general and their use in particular.
vs : There are more and more liquid alternative funds. How to make the right choices?
MW: It would be important to see what happened in markets like the US and Europe, which were ahead of the growth curve (to some extent).
His experience shows that there have been many new products (and new players in the management of alternative investments), but after a few years, the competitive landscape has tended to shift towards managers with previous credibility and/or a proven track record.
Making the right choice depends a lot on the expectations of investors. Do they want to reduce stock volatility or have a more diversified portfolio than a simple 60/40 balanced model?
Depending on the needs of the investor, it is likely that an alternative solution can be found to meet their needs. At Picton Mahoney, we believe that investors should focus on the quality of their returns, not just the quantity. One must ask how alternative investment can provide a diversification benefit to a traditional portfolio.
vs : Is this approach within the reach of all investors? These are more complex and risky products and therefore must be understood. What is the advisor’s role in properly informing their clients?
MW: I wouldn’t necessarily call these products risky. In fact, for the experienced manager, some of the objectives of an alternative strategy could actually reduce the risk (however defined) in a traditional portfolio. Definitely risky? No. Relatively more complex than a mutual fund or an exchange-traded fund? Yes, but this can easily be overcome with training like we offer at Picton Mahoney.