Investment advisor lays out the case for diversification, why higher rates are a mixed blessing, and need for deeper due diligence
As uncertainty continues to hang over the public markets and the broader economy, advisors and investors in the retail space are seeking sanctuary and opportunity in the rarefied arena of alternative investments. But not every advisor is joining the rush.
“We've been into alternatives for a number of years now, so I'm not pouring into them in a big way,” says Grant White, portfolio manager and financial planner at Endeavour Wealth Management with iA Private Wealth.
At White’s practice, alternatives have been a tool for around five years; he estimates their portfolio allocations to alternatives are currently around 10%, mostly in liquid alternatives. At those levels, he doesn’t see any need to get additional alts exposure.
From his perspective, the fact that most advisors want to put more money in alternative investments – 83%, going by a recent survey of Canadian financial advisors – represents a delayed reaction to the disaster of 2022 when both stock markets and bond markets were crushed.
Raising the odds of investment success
Trend-chasing is usually not the best investment strategy, particularly if it hinges on a repeat of a black-swan situation to succeed. But according to White, the benefits of private assets go beyond the tectonic disruption in public markets last year.
“It’s diversification, at the end of the day,” he says. “The average investor out there is looking for consistency in their returns. If their financial plan says they need to earn 5% or 6% per year on average, having more diversification gives you a higher probability of success around that.
“Our job is to give our clients the greatest odds of achieving their goals, and if having a more diverse portfolio with multiple asset classes beyond traditional stocks and bonds can help with that, then great.”
That’s not to say White is a never-say-die advocate for alternatives. Aside from the fact that it’s a broad category, he says there’s a risk of some pockets being oversold, particularly in a world where rates have risen so quickly.
“There's a lot of alternative assets that might still be facing some pain in the next couple of years, because they haven't fully realized what the ramifications are, especially if you look at certain alternative assets that are more credit-driven and potentially vulnerable to defaults,” he says. “I think the real pain on a lot of real estate will come in the next two years as leases renew on office spaces and mortgages roll over.”
Private credit: look before you leap
To be sure, there are some intriguing solutions to be explored in the private credit space. With interest rates at their current levels, White says some corners of private credit are paying extremely well. To separate the wheat from the chaff, he says it behooves advisors to dig deep so they know what they’re owning, and keep in mind why they’re owning it.
“There’s going to be some funds that look really diversified and fared very well last year. But at the end of the day, they’re not being priced on a regular basis,” White says. “The numbers today could be totally skewed relative to last year.
“I’ve been through enough downturns where investors buy into something for liquidity, but then the money gets locked up in the strategy. It happened in 2008, and it happened for a brief period in 2020 with the pandemic,” he says. “If you’re buying something, keep in mind that liquidity risk is a real thing, and make sure it’s going to actually serve its purpose when the time comes.”
Does any corner of the alternatives space look particularly compelling right now? There’s probably as many answers to that question as there are portfolio managers. For his part, White preferred portal into the world of alternative investments is mutual funds and other fund solutions, which means suitability hasn’t been a huge concern.
“We’ve seen questions about alternative investments come in from high-net-worth or ultra-high-net-worth clients who’re privy to some conversations,” White says. “In these cases, we’d explain that even if you had $5 million in investable assets, private equity deals would require a good chunk of your overall liquid net worth.
“Yes, these people are wealthy by most standards. But the amount they’d have to invest in some of these strategies would put their portfolio beyond what their risk profile dictates,” he says. “So typically, that steers them back towards an alternative fund.”
