For many investors, a well-balanced portfolio includes stocks and bonds — and maybe a little cash. But with today’s increasingly volatile markets, Mackenzie Investments believes a truly diversified modern portfolio also needs a mix of more sophisticated investments with exposure to different assets that can help provide steadier returns and better protection when markets go south.
Traditionally the purview of institutional and high-net-worth investors, so-called ‘alternative investments’ are now available to retail investors and should be considered a core holding by many investors, says Michael Schnitman, head of alternative investments at Mackenzie.
“We believe that investors should consider having at least 10-to-20 per cent of their overall portfolio allocated to alternatives, based on their investment objectives,” says Mr. Schnitman, whose firm manages more than $186-billion in assets. He also notes that the company aims to democratize alternative investments making them accessible, easier to select, understand and imbed into investor portfolios.
There are three main categories of alternative investments: alternative assets, such as infrastructure, real estate and commodities; alternative strategies, which use tools like short-selling or leverage to amplify returns and manage volatility; and private markets, which includes equity, credit, infrastructure or other categories and have traditionally been the most difficult for average investors to access.
Mackenzie has been a pioneer in the alternative space and launched Canada’s first liquid alternatives strategies mutual fund in 2018. (Liquid alternatives, also known as liquid alts, are mutual funds and ETFs that often aim to provide investors with diversification and portfolio stability through alternative investment strategies).
Shortly after, Canadian regulators changed their rules to allow greater use of alternative investments such as physical commodities and alternative strategies involving derivatives within mutual funds. Mackenzie has continued to expand its alternative investment fund offerings ever since.
Mackenzie believes the alternative space has particular appeal in the current market environment, with historically low bond yields offering meagre returns and stock valuations increasingly pricey and, some believe, due for a correction.
Alternatives have the benefit of diversification beyond traditional equities and fixed income and tend not to move in close correlation with traditional markets, Mr. Schnitman says.
“Because of the power of diversification, uncorrelated returns and different and broader tools in the toolkit, alternatives can help combat volatility in an overall portfolio,” he says.
Having exposure to private markets is also attractive to many investors, given the drop in the number of publicly traded companies in recent years, Mr. Schnitman says.
Mackenzie currently offers six liquid alt mutual funds and three exchange-traded funds (ETFs) in the alternative assets and alternative strategies categories, covering areas such as private equity replication, enhanced yield, global macro, credit absolute return, real estate and global infrastructure.
The company’s most recent fund offering — the Mackenzie Northleaf Private Credit Fund — provides exposure to senior secured floating-rate loans to global mid-market private companies.
The appeal of these instruments is the income and stronger lender protections they offer typically compared to public market debt, Mr. Schnitman says.
“It provides access to institutional private credit strategies for accredited retail investors, " he says.
The fund is the first offering with Northleaf Capital Partners after Mackenzie entered into a strategic partnership with the Toronto-headquartered institutional private markets investment firm last fall. The fund combines Mackenzie’s expertise with Northleaf’s private credit investment management experience, Mr. Schnitman says.
“There’s a multiplier effect when we partner with them,” he says.
Mackenzie sees huge potential in the private credit space, which has seen exponential growth as businesses increasingly access debt through private sources.
As an industry pioneer in alternative investments, Mackenzie benefits from an established track record in what is still a new space in Canada, Mr. Schnitman says.
He points to rapid growth south of the border, where liquid alt investments are valued at about $700-billion compared to about $10-billion in Canada.
Mr. Schnitman believes the Canadian market will begin to scale rapidly in the coming years as investors grow hungry for ways to modernize portfolio construction approaches.
“It is very feasible to see $100-billion in Canadian liquid alt assets and strategies product over the next five years,” he says.
The point of investing in alts is to adjust the risk weighting in a portfolio, so advisers need to identify the risk they're seeking to address, said panelists at the Morningstar Investment Conference.
8 months, 2 weeks ago