THE BACK PAGE investors, while some new entrants are ‘cove-nant-light’ and may lack experience, which opens Studies have up the investor to a number of risks. shown that a Past performance is a positive indicator but not 20% allocation a guarantee of future returns. Having a deep to alternatives discussion with a manager regarding their philos-has helped ophy, experience, and pattern of success can help provide a pinpoint worthy candidates for consideration. higher return Understanding how a manager performed during with less the years when stock markets were negative may volatility when demonstrate a stress test for their approach. While compared to a traditional stock markets were negative in 2008, conventional 2011, 2015 and 2018, there are examples of many portfolio of alternative managers that delivered positive re-turns those years. stocks and It is crucial to know what management teams bonds. have been responsible for driving investment re-turns and if they are still at the helm generating alpha. Gauging the success of a particular strategy and THE ALTERNATIVES LANDSCAPE determining the likelihood of a similar outcome in the There is an expanding roster of strategies and manager current climate becomes important to see if the process styles within the alternatives landscape, each providing and strategy remain viable, if the outcome is repeatable their own array of approaches and styles seeking absolute and to what probable degree. Ideally, a fund should be returns. A wise investor should do their homework and owner-operated with managers and key employees invest-consider not only the benefits alternatives may provide, but ing their own money alongside clients. also the constraints and any negative issues that may arise depending on the structure of the specific alternative man-WHY ALTERNATIVE INVESTMENTS? date. According to Willis Towers Watson, a leading global risk Many alternative assets are not fully liquid, meaning advisory firm, the world’s top 100 alternative managers saw investors are unable to purchase or redeem their invest-their assets surpass $5 trillion. There remains a strong ment as frequently as public investments that are traded appetite among pension plans, insurance companies, en-on the market. It is not uncommon that liquidity is re-dowments and institutions for alternatives. This demand stricted to monthly or quarterly, but in some cases, liquid-is likely to persist, because with pension plans, Canadians ity may be offered only after several years. In some ways, are living longer than ever before, and plan providers real-ize that many will spend more years in retirement than they this constraint is part of their allure. There are alternative investment managers that invest in did working. With interest rates still super low, pension real estate, such as a portfolio of apartment properties or investment committees recognize that they need to look long-term care facilities, and therefore do not offer inves-beyond traditional bonds for long-term income and will tors daily liquidity because the underlying asset class is likely continue sourcing attractive assets within the alter-illiquid to begin with. Offering daily liquidity would jeop-native space. ardize long-term investors at the expense of short-term One common misconception about alternatives is that speculators who wish to trade in and out of the mandate. they are only accessible to pension providers and institu-This would drive up costs within the investment, thereby tional investors. While that may have been true years ago, these investments have become available to a broader range negatively impacting long-term, loyal investors. Some investors may view a liquidity constraint as a of investors who meet certain eligibility criteria such as downside, however, while liquidity is important, this income or net worth thresholds. Today, a full service and shouldn’t be an over weighted factor when selecting ap-independent advisor may access a broad range of alterna-propriate investment vehicles within a diversified portfolio. tives for his or her clients with the intention of generating Pension plans, for instance, do not abandon an investment positive returns regardless of the state or direction of the simply due to it being illiquid; rather, they often prefer market. illiquid investments because they are not subject to the An independent, full-service advisory team should pos-same emotional gyrations of the market. Oftentimes, they sess the skill and ability to access some of the best-in-class offer much higher income and long-term returns which investment opportunities and managers. After conducting rigorous, objective and thoughtful due diligence, a profes-pension plans desperately require. Since there is a growing appetite for non-traditional sional advisory team should present clients with a recom-assets among investors, there have been many new firms mended investment solution, including a discussion on the entering the space in an attempt to capitalize on this trend. suitability of alternative assets. Alternative investments can offer an effective avenue for It is important to know that not all alternatives are created equal. Some private credit funds are high quality and pro-investors to diversify their portfolio so as to achieve the vide secure collateral and sound covenants for their highest success for their desired outcome. allocation to alternative strategies comprised over 30% of total assets (compared to a zero weighting in 1999 when the plan was virtually all government bonds, which would have paid notably higher in-terest rates than current rates). The Pension In-vestment Association of Canada, which oversees 140 pension plans in Canada representing $2 trillion in pension assets, shows nearly 30% of total pension plan assets were in alternative invest-ments at the end of 2018. In fact, many of Canada’s largest pension funds have at least a 20% weighting in alternatives. Var-ious studies compiled by industry leading firms such as JP Morgan, Barclays and Morgan Stanley, have shown that a 20% allocation to alternatives has helped provide a higher return with less vola-tility when compared to a conventional portfolio of stocks and bonds. 30 Canadian Chiropractor April 2020 www.canadianchiropractor.ca
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