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Jonathan Chevreau is founder of the Financial Independence Hub and co-author of Victory Lap Retirement. He can be reached at jonathan@findependencehub.com
Have markets reached a tipping point that requires serious investors to diversify beyond traditional stocks and bonds?
So-called "alternative investments" have long been the preserve of pension funds and well-heeled accredited investors, providing access to non-traditional asset classes such as private equity, infrastructure, hedge funds, emerging-market debt and limited partnerships.
For individuals, alternative investments are often sold through "offering memorandums" under the Sophisticated Investor rules (investment portfolios of $1-million or annual family income of $300,000).
With interest rates on the rise and the Trump reflation trade poised to slow gains in priced-to-perfection equities, the argument for diversifying beyond traditional stocks and bonds is becoming more compelling. Increasingly, private money managers such as Toronto-based TriDelta Investment Counsel see value in alternatives. They provide a "proven path to higher and stable returns," according to a TriDelta backgrounder on the topic. (TriDelta provides direct access to alternatives on a discretionary basis.)
Enter mutual-fund giant Mackenzie Financial Corp., which of late has been scooping up $30-million a month in a mutual fund designed to complement an old-fashioned balanced fund and the usual 60/40 asset mix. The Mackenzie Diversified Alternative Fund ("MDAF," Series A and Series F) has a standard minimum investment of $500, in reach of any investor with a financial adviser. Launched two years ago, it has $350-million in assets, says Allan Seychuk, Mackenzie's senior investment director of asset allocation.
Like most domestic mutual funds, the management expense ratio is higher than equivalent exchange-traded funds: It's 2.42 per cent for the A series and 1.25 per cent for the F series, where fee-based advisers will add their own fee (typically another 1 per cent). However, affluent investors get a price break through Mackenzie Private Wealth Solutions' preferred-pricing program. The basic management fee of 0.8 per cent falls to 0.7 per cent as combined household investment in all its funds hits thresholds of $250,000, tapering down more at $500,000 (0.65 per cent), $1-million (0.6 per cent), $3-million (0.55 per cent) and $5-million (0.5 per cent). Also, since MDAF is not a hedge fund, there are no extra performance fees.
Mackenzie marketing material suggests 20 per cent of one's overall portfolio as the suggested allocation to MDAF. Its case for alternatives is based on a "smoother ride" and reduced reliance on equity-market risk and interest-rate risk. It says "traditional" equities and bonds are expensive, and "non-correlated assets" can improve the return/risk ratio.
However, critics question how non-correlated the fund is. Dan Hallett, a principal with Oakville, Ont.-based Highview Financial Group, says MDAF's 20-month history through June shows performance highly correlated with plain-vanilla stocks and bonds. There are "modestly higher returns," but they come with "significantly higher downside risk and volatility."
Mr. Hallett also questions the perception that MDAF mimics the big pension funds that invest directly in things such as real estate and infrastructure. MDAF invests indirectly in alternatives via traditional public markets, using vehicles such as ETFs and Mackenzie's own mutual funds.
Morningstar Canada says MDAF is not under analyst coverage, and there are no Morningstar ratings in the alternative-strategies category. Nor is MDAF on TriDelta's recommended list.
Morningstar shows all but one of the fund's top 10 holdings are in ETFs, including six from iShares and two from Vanguard. The second-largest holding (at 5 per cent) is one of Mackenzie's own funds: Mackenzie Unconstrained Fixed Income Series A. MDAF also holds the Mackenzie Gold Bullion Fund.
A Mackenzie performance summary shows annualized performance since inception at Oct. 27, 2015, of 9.7 per cent as of the end of May, topping comparable rivals over the same period such as Dynamic Alternative Yield, Manulife Global Absolute Return Strategy and – in the ETF space – iShares Alternatives Completion Portfolio Builder.
Tyler Mordy, president and chief investment officer of Kelowna, B.C.-based Forstrong Global Asset Management Inc., agrees many alternatives are "merely existing asset classes repackaged, normally with higher fees." Forstrong's two Global Strategist Funds compete with MDAF in the alternative space.
In an interview, Mackenzie's Mr. Seychuk says MDAF is not a hedge fund, nor is it market-neutral or absolute return. As a standard mutual fund governed by National Instrument 81-102, it can't short or use leverage. MDAF's risk rating is "low to medium." While some dealers see the "alternative" name as a red flag for risk, Mr. Seychuk says the whole point of the fund is to reduce risk.
In fact, it would be much riskier for do-it-yourself investors to buy alternative asset classes directly on their own. On a million-dollar portfolio, 20 per cent, or $200,000, is a hefty bet if concentrated in any single alternative asset. MDAF offers a prudent, much more diversified way to dip one's toes into the alternative waters: The fund managers (based in Toronto), cannot concentrate more than 10 per cent in any one alternative-investment category and no more than 10 per cent can be in illiquid assets.
The fund is also more liquid than most hedge funds. Many directly sold alternatives don't let investors redeem on demand, while MDAF can be sold any time, like most mutual funds. A simple "one-ticket" product does have some appeal. Mackenzie says it's also sold by brokers but one veteran broker who didn't want to be named is nevertheless skeptical. "How can a fund that's called alternative be full of other funds and ETFs?"
He suggests investors can do better buying the stocks of Mackenzie parent companies IGM Financial or Power Financial, which yield respectively 5.4 per cent and 4.9 per cent.
Now there's an alternative!