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The recent stock market downturn has prompted advisors to review strategies that could prevent investors from losing some of the value of their portfolios. For some, the answer lies in alternative investments such as private equity and debt, real estate and infrastructure.
Institutional investors have been investing in alternatives for decades, but they have become more accessible to retail investors through various funds in recent years.
Mackenzie Investments recently launched the Mackenzie Northleaf Global Private Equity Fund, its fourth private markets investment in partnership with Northleaf Capital Partners Ltd.
Globe Advisor spoke with Michael Schnitman, Head of Alternative Investments at Mackenzie, about the alternatives and why advisors should consider them as part of their clients’ portfolios.
What exactly are alternative investments?
Alternatives, at a high level, fall into three categories: alternative strategies, that is, those that use short selling or leverage as tools for their investment approaches; alternative assets, which are non-traditional asset classes like real estate and commodities; and private markets, including private equity, private credit, private infrastructure and specialty finance.
Why should advisors incorporate alternatives into their clients’ portfolios?
We believe it is essential that retail investors have access to private markets.
Alternatives are important because they can help mitigate the volatility of an overall portfolio and they can expand the opportunities available to investors. They offer strong expected returns and lower volatility, untapped diversification and institutional quality management. Consider that publicly traded companies make up only about 2% of global companies, which means 98% of them are private. This in itself demonstrates the opportunity of private markets for retail investors.
What are the risks ?
With any investment, manager selection is a risk. You should look for managers who are experienced in a long-standing, repeatable investment process and who know how to invest through different market cycles. There is also liquidity risk with private assets. You cannot enter and exit these funds on a daily basis.
How should advisors use alternatives in client portfolios?
How they are used depends on what their advisor feels is most appropriate for a client given their age and overall financial plan. Whether they have more credit or more infrastructure or more equity – or equal slices of all three – is up to the advisor.
How should advisors use alternatives in the context of the current stock market decline?
Advisors should consider alternatives regardless of what they think will happen in the stock markets.
For example, if you think we’re in for high volatility and lower stock markets longer term, then you want to be in private equity, which has historically shown much less downside and lower volatility than securities. listed on the stock exchange.
If you think this is just a hiccup, a short-term correction that will be followed by significant growth over the next nine to 18 months, then you still want to be in private equity , but for very different reasons. If you think stock markets will rebound, private equity has historically posted hundreds of basis points of outperformance relative to publicly traded indices.
So when you insert 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, Globe and Mail Special
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