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The recent stock market downturn has advisors revisiting strategies that could protect investors from losing a chunk of their portfolios’ value. For some, the answer is alternative investments such as private equity and debt, real estate and infrastructure.
Institutional investors have invested in alternatives for decades, but they have become more accessible to retail investors through various funds in recent years.
Mackenzie Investments recently launched Mackenzie Northleaf Global Private Equity Fund, its fourth private markets offering in partnership with Northleaf Capital Partners Ltd.
Globe Advisor spoke with Michael Schnitman, head of alternative investments at Mackenzie, about alternatives and why advisors should be considering them as part of their clients’ portfolios.
What exactly are alternative investments?
Alternatives, at a high level, fall into three buckets: alternative strategies, meaning those that use shorting or leverage as tools for their investment approaches; alternative assets, which are non-traditional asset classes such as real estate and commodities; and private markets, including private equity, private credit, private infrastructure and specialty finance.
Why should advisors be incorporating alternatives into their clients’ portfolios?
We feel that it’s essential for retail investors to have access to private markets.
Alternatives are important because they can help dampen the volatility in an overall portfolio and they can extend the opportunity set for investors. They provide strong expected returns and lower volatility, untapped diversification and institutional quality management. Consider that publicly traded companies represent only about 2 per cent of global companies, which means 98 per cent of them are private. That in itself demonstrates the opportunity of private markets for retail investors.
What are the risks?
With any investment, manager selection is a risk. You have to look for managers who are experienced with a longstanding repeatable investment process and who know how to invest over different market cycles. There is also liquidity risk with private assets. You can’t get in and out of these funds on a daily basis.
How should advisors use alternatives in clients’ portfolios?
How they’re used depends on what their advisor believes is most appropriate for a client given their age and overall financial plan. Whether they should have more credit or more infrastructure or more equity – or equal slices of all three – that’s up to the advisor.
How should advisors use alternatives amid the current stock market downturn?
Advisors should consider alternatives regardless of what they think will happen in the stock markets.
For example, if your view is that we’re in for high volatility and declining stock markets, longer term, then you want to be in private equity, which has always exhibited significantly less downside and lower volatility than publicly traded securities.
If your view is that this is just a blip, a short-term correction that will be followed by significant growth over the next nine to 18 months, then you also still want to be in private equity, but for very different reasons. If you believe stock markets are going to take off again, private equity has always exhibited hundreds of basis points of outperformance versus publicly traded indexes.
So, when you infuse private market strategies into an overall portfolio construction or asset allocation, you have a smoother risk profile.
This interview has been edited and condensed.
- Brenda Bouw, special to the Globe and Mail
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