Today we’re talking about alternative asset classes and how and why they should be in your portfolio. An alternative asset class is not a stock and it’s not a bond. It’s something completely alternative. Historically in the CPP (Canadian Pension Plan) and historically in all of these endowment funds, the largest ones in North America used to have nothing but stocks and bonds. Then something started happening in the 80s. Harvard, MIT, the CPP started adding alternatives. They would buy actual private equity. They would buy companies and would look at private real estate. Most of them would look at infrastructure, look at private debt and anything to get an alternative asset class. The key is to have it uncorrelated to the performance of the stock market.
Why does that matter? Because when you’re getting crushed in your portfolio on your stocks like 2018, you want to be able to have a portion of your portfolio that actually has gains that made money and that didn’t fall with the rest of the portfolio.
This is the reason why we love to have alternatives. We consistently build them and the investment portfolios have consistently outperformed because of our alternatives. For the alts, I’ll give you a few examples:
- An easy one is private REITS or limited partnerships and real estate. Those have very low volatility, very little movement in the actual asset class performance and the shares are fairly stable. They pay a consistent cash flow. They are very tax efficient and over time they had consistent growth; the 13% to 15% range. Therefore, if we can add that to a portfolio when the markets are up or when the markets are down, that’s a phenomenal asset class to own and does wonders for risk adjusted returns.
- Another example would be private debt. Private debt is essentially owning the mortgage on a building, on a property and/or on the development. We’re able to get 7% – 8% on private debt using first mortgages. That is something that I want to own for my clients because it’s defensive. It’s got a core structure that is generally very conservative in nature. It pays monthly income and my clients have security on their assets. It’s a fantastic replacement for a portion of a fixed income portfolio with consistent cash flow.
- Third example are structured notes, principle protected notes or equity linked notes. We love these alternatives because we can structure them specifically for clients. I’ll give you a very straight and simple example: We take an underlying asset class and then we tie it to a bank style bond. Basically, it’s a bond issued by a bank that guarantees the future capital. The capital is guaranteed for clients. They also get to perform and participate in the upside of the market. Typically, if the market is up 10 percent per year, clients get that benefit while having the full principal protected. Notes are an alternative asset class that has grown immensely in the last few years and if you’re not participating in this type of asset class, you really should consider it. It’s a no brainer in my opinion. It does wonders for the risk adjusted returns in portfolios.
- Finally, there is private equity. There’s a lot of private equity deals that are structured and these would be considered like a hedge fund type investments. Not all hedge funds are created equal. Many of them are extremely risky and it’s not something we want to do. We like to focus on the conservative hedge funds that have private equity. We also want to work with those that we trust, those with strong management that provide exceptional work.
We’re able to focus on those four asset classes that have either way less volatility, no correlation to the market and that can provide cash flow or can provide capital protection. They do amazing work for you and your portfolio, and this is the reason why we love the asset classes. I highly suggest that you consider having these in your portfolio.
If you’d like to schedule a call with me and discuss further on Alternatives or anything related to your portfolio management, just click the button below and I’d be happy to help.