Why advisors could find evolving offerings particularly useful for diversification strategies tailored to their clients' needs
The democratization of investing took another significant leap this summer with the introduction of a series of private markets funds that are looking to do to private assets what ETFs did to traditional stock and bond markets 30 years ago—make them accessible, diversified, and more easily tradable for the average investor.
Much like how ETFs opened up investing in publicly traded assets in the 1990s, these new private markets funds - various types of investments in private equity, private real estate, private credit, and other non-publicly traded assets - allow investors to buy a single financial instrument that represents ownership in multiple assets in the private investment space.
In Canada, firms like CI Global Asset Management, Fidelity, and BMO Global Asset Management are rolling out new private market products with varying fund structures. CI GAM, for example, offers open-ended private market growth and income funds using a fund-of-funds structure, designed to give investors exposure across different private market asset classes.
Adding another layer of sophistication to the landscape, Purpose Investments launched its Purpose Private Asset platform in April. The platform aims to streamline investing in alternative asset funds and brings an educational component, with tools to help financial advisors deepen their understanding of alternative investment strategies. Their offerings allow for as low as a $5,000 minimum investment and are designed to make it easier for Canadians to include private assets in registered accounts.
"This is the first time that we're seeing large firms, dealers putting together funds with private investments. What that can offer an investor is additional diversification,” says Ray Punn, Vice President, Wealth Solutions at Skyline Wealth Management. “These upcoming products are perfect because they shouldn't have the same level of volatility as a publicly traded mutual fund or ETF."
These funds enable retail investors to spread risk and seek returns in markets previously reserved for institutional investors. Given the anticipated increase in retail investor interest in private market allocations—from 2%–5% today to a predicted 10%–20%— advisors could find these evolving private market options particularly useful for crafting diversification strategies tailored to their clients' needs.
The move is part of a decades long shift in the industry towards greater diversification options and inclusivity, breaking down traditional barriers to entry. As market volatility continues to drive investors away from traditional investment vehicles, alternative assets are taking centre stage. The shift in attention is due to the resulting low returns from traditional investment vehicles like mutual funds and ETFs.
“There's been what we call net redemptions from mutual funds and ETFs for the last couple of years with some of the major players out there. And that's because of the volatility. All throughout COVID returns weren't the hottest,” says Punn. This trend has seen a shift in investor focus towards alternative investment options that promise more stability and less exposure to market whims.
“Interest rates have really created a lot of volatility,” Punn says. “There's a lot more default in the debt space right now. And that is causing some turmoil, at least in the financial markets.”
Skyline specializes in private alternative investment funds in real estate and clean energy, designed to provide retail investors with stable returns while mitigating market volatility.
Firms like Skyline have been championing alternative investments helping to make them increasingly accessible to individual investors leveraging off several pivotal changes in recent years.
Regulatory shifts have allowed for greater participation from retail investors, while financial products like ETFs offer easier entry points. Advancements in technology, particularly FinTech solutions, have also democratized access - providing valuable research tools and lowering the barriers to entry.
Punn emphasizes a fundamental shift in the investment strategies of large pension funds like the Canada Pension Plan Investment Board (CPPIB), which have decreased their equity exposure to focus more on private investments like real estate, infrastructure, and private equity. He contrasts this strategy with traditional portfolio management, which generally adheres to a 60/40 equity-to-fixed-income ratio. Punn suggests that pension funds are leading the way in diversifying portfolios as a hedge against market volatility and risk.
"Private investment doesn't fluctuate or doesn't get hindered by the same emotional triggers that fluctuate a public stock," he says.
Now, in this kinetic, ever evolving world of alternative investments, there’s a new kid on the block - private markets funds - and it’s got a lot of forward-looking fund managers taking notice. And while they offer an enticing proposition, it's essential to note that they come with their own set of risks. Most prominently, these investment avenues often have higher illiquidity and less transparency than their publicly traded counterparts. They may also have higher entry costs, necessitating a more substantial initial investment. Moreover, because these baskets operate in less regulated markets, there is always the risk of insufficient oversight.
On the flip side, these private markets funds can provide substantial rewards, primarily through their potential for high returns and reduced exposure to market volatility.
These fund baskets are showing promise as the next step in the ongoing democratization of investing, enabling investors to diversify into alternative assets that were once off-limits.
