By James Burton. Originally published in Wealth Professional, Dec 16, 2019
It’s been one of the main narratives of the year in wealth management: alternatives are on the rise. More investors are seeking ways to diversify their portfolio and are eyeing up investments not correlated to the public markets in order to generate income.
It’s a trend Ninepoint Partners, which offers multiple strategies across the alternative investment landscape, are on top of. They feel it is time for Canadian investors and advisors, who have traditionally had low levels of alternative allocation, to start rethinking the role of alternatives.
“A few years ago, we would spend a lot of time with investors explaining the role of alternatives in portfolios, what they are and what they do. Within the last few years, people are now coming to us with interest and the conversation has evolved to explaining what their choices are and what they need to be aware of with an alternative product,” said John Wilson, co-CEO, managing partner, senior portfolio manager, Ninepoint Partners.
Wilson noted that the investment landscape has changed and allocations to traditional investments, like stocks and bonds are being done with passive tools. “People are now looking for things that are not correlated to the market, they are looking to diversify. Since the 2008 financial crisis, investors have been looking for a new way to generate the returns that they used to get from fixed income.”
James Fox, co-CEO, managing partner, Ninepoint Partners, says that while the 2008 crisis was a turning point, Q4 of 2018 was a catalyst for the rise in alternatives’ popularity. “The correction in Q4 last year really showed the poor performance of both equities and fixed income. That led advisors to look for other options. Alternatives are generally not correlated to the market, so adding them can help your risk-adjusted returns. Institutional investors have been aware of it for years, and now we are seeing it more in the retail space.”
While interest is up across the board, Fox says that Ninepoint has noticed it particularly with their private credit funds, such as the Ninepoint TEC Private Credit Fund, Ninepoint Trade Finance Fund and RiverRock Mortgage Investment Corporation (MIC). “The need for income is increasing among investors because they are not getting the same yield from public fixed income markets as they used to. We have seen lots of interest and flows in our alternative income funds because they have produced consistent returns and are not tied to the public market.”
Fox added that the liquid alternative market is another area that they are seeing interest as advisors look to diversify their asset allocation. That coincides with new regulation on alternatives that went into effect earlier this year.
While Wilson doesn’t think the new regulations alone contribute to the increases in popularity of those strategies, he says they have helped to improve access. “The regulation changes had been talked about for a while, so I think people were aware that it was coming. Alternatives have been used on the institutional side but now it has moved to retail and I think the regulations have made things easier for retail investors to access these strategies.”
While Ninepoint has seen increased flows into private credit and liquid alternative funds, they currently offer numerous funds with different exposures to the alternative category. “We look across the industry for opportunities because we are a firm that knows how to innovate products,” Wilson said. “Since we are at the end of the business cycle, we believe you will start seeing other strategies come into play. We don’t think investors should put all their eggs in one basket, that is why we offer a wide range of alternative strategies.”
Canadian investors have been a laggard when it comes to adding alternatives to their portfolios, outside of institutional investors and pension funds, compared to other areas of the world. Fox chalked that up to the longer lock-up periods with alternatives, along with less liquidity. With retail investors being accustomed to daily liquidity, he says lack of liquidity should not necessarily disqualify an investment solution from consideration. There are times when a less liquid investment can provide tremendous advantage as part of a portfolio.
“Pensions have known about this and, since they have a longer time horizon, they have taken advantage of the premium for lack of liquidity. Retail investors, in the public markets, are used to daily liquidity. It is something we need to be aware of when structuring products and why educating investors around alternatives is important.”
Ninepoint recently held their first Alt Thinking Investment Forum for financial advisors this past November. The purpose of the event was to explore new thinking on managing portfolio risk, and this year’s focus was on private debt. As a testament to advisors’ interest in the topic, the event sold out in a day-and-a-half. “This wasn’t a sales event,” explained Fox. “This was designed to be entirely educational. Alternative investments can be a little more complex than traditional stocks and bonds, and we’re committed, as a firm, to helping investors better understand where these sorts of investments fit within their portfolio strategies.”
While the adaptation has been slower in Canada, both Wilson and Fox agree it is time for advisors to start looking at incorporating alternatives on a client by client basis. “It really depends on the client, their liquidity needs, risk tolerance and where they are in their income cycle,” said Wilson.
“The main reasons are the improved risk-adjusted returns, increased diversification and to avoid what happened in Q4 2018, where both equities and fixed income didn’t work. It is hard to recommend a certain per cent to allocate, we feel that is up to the advisor as they become more comfortable with the asset class,” added Fox.