A 2020 vision for Canadian alternative investments

It’s certainly difficult to think of a thesis to encapsulate the stories and trends that captured the world of investing in 2019. But for more than a few portfolio managers, one floats to the surface: the case for alternative investing is growing.

Gene Kim, Portfolio Manager and Private Wealth Manager at the Summit Private Wealth group with Mandeville Private Client Inc, and one of the Best Financial Advisors in Quebec, counts himself among that group. “The fundamental objective of any portfolio is to achieve a certain absolute return over a number of compounding years,” he told Wealth Professional. “And quite frankly, it’s getting more and more difficult to do that using only the tools in the public markets … I think the writing’s on the wall.”

The equity markets have seen one of their strongest decades, but as Kim noted, it’s almost certainly closer to late-stage than early-stage. The odds of a recession rise with each passing month; volatility from trade tensions, bombs dropped on Twitter, and growing populist sentiment continue to be a concern.

Things are also tough on the fixed-income side. Amid persistently low interest rates and dovish policies arguably led by the Federal Reserve, 10-year bonds are fetching yields in the neighbourhood of 2%. That’s not so good for retiring investors, especially as they have to pay a premium for many of those bonds.

“People naturally get nervous, and part of our job is to choose our battles,” Kim said. “Rather than try to manage unpredictable variables, we have to focus on what we can control: the risk in the portfolio, the yield of the portfolio, and the fundamentals that determine which high-quality businesses are worth investing in.”

Given the need for diversification, along with cash flow and yields that are potentially more predictable, a dose of alternatives exposure makes perfect sense. For Canadian investors, the opportunity set in non-public investments has been growing with offerings from new entrants as well as established managers. Awareness is also on the rise thanks to educational efforts by the alternative investment industry and dealers such as Mandeville that seek to democratize access.

“We’re not trying to reinvent the wheel. The blueprint’s been written,” Kim said, referring to the portfolios of pensions, endowments, and other institutional investors. “We see what the smart money is doing. And I think in the retail space, it shouldn’t be that much different.”

While he believes that alternative investments deserve a place in every portfolio, he advocates a prudent approach. “The level of private investment should be measured against the client’s risk profile and level of sophistication,” he said, stressing the importance of the know-your-client process. There also has to be a view toward whether a strategy makes sense from a tax perspective, and whether it could or should be placed in an RRSP, TFSA, or non-registered account.

And while Canada’s alt-investment space is expanding, it’s still very limited especially in comparison to markets such as the US. That creates an imperative for proper due diligence — not just to avoid weak or murky investments, but also to create the proper alignments of interests.

“I think making sure you’re aligning yourself with the right investment sponsors is instrumental,” he said. “We want to make sure each sponsor relationship we have is philosophically the right one from the perspective of the dealer, the advisor, and the client.”