More asset managers are focusing on educating advisors about alternative asset options and how they fit into client portfolios.urfinguss/iStockPhoto / Getty Images
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The dismal performance of both stocks and bonds in 2022 in the wake of rising interest rates left investors asking, “How will I reach my investment goals with both major asset classes tanking?” The answer to that question led many advisors and investors to turn to alternative investments. In turn, fund companies heeded the call by creating additional products and educational programs on the asset class.
The range of alternative investments is broad, and not all advisors or investors are certain how they fit into a typical investment portfolio. Alternative investments can include risky leveraged 2x bull or bear exchange-traded funds (ETFs), long-short equity funds, real estate, private credit and conservative market neutral funds. These assets are not as correlated to the performance of either the equity or bond markets, so they can boost portfolio diversification.
Since a rule change in early 2019 that allowed advisors with broader access to liquid alternative investment funds for average investors’ portfolios, asset managers and fund companies have launched a range of new alternative asset funds to capitalize on the new interest in this asset class. And that interest is growing, says Will Stevenson, a senior associate with Investor Economics, a division of ISS Market Intelligence, which issued a report illustrating how asset managers have responded and are responding to the rising demand.
Advisors are looking for another asset class that can add some diversification, he says. But because many of these alternative asset investments are new and different, “if the advisor doesn’t understand the strategy, then their clients won’t understand the strategy,” he explains, adding that asset managers are focusing on educating advisors about alternative asset options and how they fit into client portfolios.
Alternative investments “will be an important part of the flows for the next several years,” Mr. Stevenson adds. According to recent research from his firm, “Companies that provide in-depth training for advisors – usually involving their wholesalers who later work with advisors in portfolio strategies to integrate the mandates – are generally gaining ground.”
Alternative investments are growing in Canada. Assets under management in this category rose to $39.7-billion in March of this year from $11.7-billion in January 2017, according to Morningstar Canada data. There are currently 339 mutual fund or ETFs under the alternative banner, with 188 funds launched since 2019.
Canada has been slower to adopt alternative investments, says Tyler Meyrick, chief financial officer of Purpose Investments Inc., but not because they aren’t interested in them.
“It’s because there’s a need to gain a greater understanding of how these products work, how you access them, how they fit into portfolios, and understand their usefulness,” he says.
Purpose Investments built a private asset online portal to help educate advisors on its products, which include Purpose Pantheon Private Equity Fund, Purpose Apollo Private Credit Fund and Purpose Bluerock Private Real Estate Fund. Purpose Investments also has an array of other funds that fall under the alternatives banner ranging from Purpose Structured Equity Growth Fund to the Purpose Bitcoin ETF BTCC-B-T.
Advisors can take courses on the platform about the role of alternatives, private equity and private credit, “understand the risk-return trade-offs they’re making and then how [these funds] would work with a portfolio’s construction to fit into achieving their clients’ goals,” Mr. Meyrick says.
“Education is a huge piece of it” for the firm’s wholesaling team and its advisor clients, so they understand Purpose Investments’ products, how to access them effectively and include them in an overall portfolio strategy.
Mr. Meyrick says the typical 60-per-cent equities, 40-per-cent bond portfolio can be altered to be 50-per-cent equities, 30-per-cent bonds and 20-per-cent alternative or private assets. Portfolio modelling suggests this allocation “creates a more efficient portfolio” with a more favourable risk-return trade-off, he notes. But it’s a new way of thinking for many advisors as these products have only been widely available in the past few years.
Part of Purpose Investments’ education offering shows advisors step-by-step instructions on how to buy these funds with the technology and systems they currently use. “People are busy, they’re not going to go out of their way to try to chase down how to use these more specialized alternative products because they’ have plenty [of products] to use today,” he says.
Once advisors get familiar with Purpose Investments’ alternative funds, they generally stick with those products for some time and flows to them increase gradually, Mr. Meyrick says.
Offering alternative investment funds that are in demand, and having a strong educational component supporting them, is a way for the company to solidify its partnership with new advisors and familiarize them with its entire suite of products, he says.
“What we’ve seen in the market over the past while was advisors want to deal with fewer fund managers, but do more with them,” he says. “The fund managers who can give them better service, better products, better knowledge will get more business than in the past, when an advisor might have bought five or 10 products from five or 10 different asset managers.”
Earlier this year, Fidelity Investments Canada ULC launched a new suite of alternative strategy funds and ETFs, including Fidelity Canadian Long/Short Alternative Fund and ETF series, along with ETF versions of its Fidelity Market Neutral Alternative Fund, Fidelity Long/Short Alternative Fund and Fidelity Global Value Long/Short Fund.
The asset manager has an alternative strategist who meets with advisors and does presentations to advisor groups about how to use these funds in portfolios, says Andrew Clee, vice-president of product at Fidelity Investments Canada. “The reason we introduced them was to offer that additional support that’s needed in the asset class.”
The firm has an education centre to help advisors with portfolio construction, it also hosts advisor conferences with sessions dedicated to alternative investments, and it holds webcasts on specific topics regularly, he notes.
Fidelity Investments Canada’s wholesale team goes through a rigorous education program on new products so they understand how alternative assets fit into portfolios, their strategies and the risks, Mr. Clee adds.
“We’re moving to a point at which your asset classes are fixed income, equities and alternatives,” he says, adding that alternatives are slowly making their way into balanced portfolio products.
“When you can introduce diversification that improves risk-adjusted returns, which both private and liquid alternatives do, there’s going to be interest in total portfolio solutions.”
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