Some advisors are allocating a greater share of clients' money into assets outside of conventional equities and fixed income.Olivier Le Moal/iStockPhoto / Getty Images
Sign up for the Globe Advisor weekly newsletter for professional financial advisors on our sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know. For more from Globe Advisor, visit our homepage.
In late 2022, Simon Doran and his partners launched a private pool for their clients that invests exclusively in alternative assets with return profiles not tied to public markets, or that employ strategies to mitigate those risks.
The senior wealth advisor and portfolio manager with Holyk Doran Wealth Management Group at National Bank Financial Wealth Management in Vancouver, says the move was a response to the massive drawdowns in stocks and bonds during that painful year. His group was also wary of the mania that had seized public markets at the height of the pandemic.
“Toward the end of 2021, we started to see things getting a little carried away. You had interest rates going to zero again, and bonds rallying to crazy levels. We found ourselves saying, ‘It sure would be nice to have this alternatives offering,’” Mr. Doran says.
Today, the pool occupies anywhere between 16 and 20 per cent of a typical client’s portfolio.
“Within that structure, we have long-short fixed-income funds, long-short equity funds, market-neutral equity funds, merger-arbitrage funds, as well as real estate, mortgages, private equity and commodities,” Mr. Doran says.
He isn’t alone among advisors looking outside conventional equities and fixed income in the wake of a historically rocky stretch for stocks and bonds. The interest comes as global private asset and alternative fund operators look beyond their traditional clients of pension funds, endowments and other institutional players for growth.
“It is an exciting time in the market, for several reasons,” says David Wong, chief investment officer and managing director, total investment solutions, at CIBC Asset Management Inc. “Traditionally, access to these private strategies has been available only to large institutions writing big cheques, but are now available to individual investors who have tens of thousands of dollars to allocate instead of tens of millions.”
Pensions and other large money managers have long held overweight allocations to private markets in which returns aren’t correlated to the stock or bond markets and can sometimes be higher. With growth among institutional clients slowing, Mr. Wong says, global private market operators see an opportunity to partner with asset managers and create new fund structures that lower the barrier to entry for other investors.
Like other large Canadian asset managers, CIBC Asset Management has looked to strike partnerships with private equity and credit giants such as Ares Management Corp. and KKR & Co. Inc.
CIBC Ares Strategic Income Fund is one example that provides accredited investors exposure to global private credit. Last year, BMO Global Asset Management paired with Partners Group Holding AG to launch its own private asset fund and will soon launch a private equity fund with Carlyle Group Inc.
CIBC Asset Management is currently developing another strategy to give investors access to private equity through a partnership with KKR.
“We use our scale to go out and find great investors who have their own scale and skill sets in great underlying strategies,” Mr. Wong says.
While direct ownership in the Ares fund is reserved for accredited investors, smaller clients can get exposure through CIBC Asset Management’s managed solutions platform, an $80-billion pool that holds positions in the private credit fund. CIBC Asset Management also intends to have the pool invest in the KKR vehicle when it becomes available later this year.
That same principle applies to Mr. Doran’s pooled fund. “For that smaller client, they can buy $5,000 of our private pool or $50,000 and get that exposure to all the different alternatives we hold positions in,” he says.
Various risks to consider
There are risks with any investment, and private assets and other alternatives are no exception, says Himalaya Jain, senior investment advisor and portfolio manager with the Rosedale Family Office in Toronto at Wellington-Altus Private Wealth Inc. One issue is transparency.
“What you get with a public company is full disclosure, analyst coverage and a lot of scrutiny as to how a company is doing. In alternatives, you don’t get that kind of visibility, at least on a frequent basis,” he says, adding there have been issues with some alternative strategies in Canada.
“You have to place a lot more faith in who you’re investing with, and you want to be confident that you know what you’re invested in,” Mr. Jain adds.
There are also liquidity constraints to be aware of. Despite efforts to create “evergreen” funds in private assets, there can be temporary holds on redemptions and other terms that may lock a client’s capital up for a period of time.
Still, Mr. Doran says the evolution of alternatives from the province of only the biggest investors to now being accessible to the many will continue.
“These are asset classes that were only available to institutional investors for decades,” he says, adding that many of them have increased their allocations significantly.
“Those are the smartest guys in the room and the only reason small investors weren’t involved is because it wasn’t available to them.”
For more from Globe Advisor, visit our homepage.