Advisors should consider alternative investments no matter what happens in the stock markets

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The recent downturn in the stock market has led advisors to reconsider the strategies that can protect investors from losing a significant portion of the value of their portfolios. For some, the answer is alternative investments like private equity, debt, real estate and infrastructure.

Institutional investors have invested 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 market offering in partnership with Northleaf Capital Partners Ltd.

Globe Advisor spoke with Michael Schnitman, Head of Alternative Investments at Mackenzie, about 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 groups: alternative strategies, meaning those that use short selling or leverage as tools for their investment approaches; alternative assets, which are non-traditional asset classes such as real estate and commodities; and private markets, including private equity, private credit, private infrastructure, and specialized finance.

Why should advisors incorporate alternatives into their clients’ portfolios?

We feel it is essential for retail investors to access private markets.

Alternatives are important because they can help smooth out fluctuations in the overall portfolio and can expand opportunities for investors. They offer strong expected returns and lower volatility, untapped diversification and institutional quality management. Keep in mind that publicly traded companies represent only 2 percent of global companies, which means that 98 percent of them are private companies. This in itself is indicative of the opportunity for private markets for retail investors.

What are the risks?

With any investment, choosing a manager is a risk. You should look for managers who have experience in a long-term, repeatable investment process and know how to invest over different market cycles. There is also liquidity risk with own assets. You cannot get in and out of these funds on a daily basis.

How should advisors use surrogates in client portfolios?

How they are used depends on what their advisor believes is most appropriate for the client given their age and overall financial plan. Whether they should have more credit, more infrastructure, more equity — or equal slices of all three — is up to the advisor.

How should advisors use alternatives in the current downturn in the stock market?

Advisers must consider alternatives regardless of what they think will happen in the stock markets.

For example, if your view is that we’re experiencing extreme volatility and downturns in the stock markets, over the long term, you’d want to be in private equity, which has always shown less downside and far less volatility than publicly traded securities.

If your view is that this is just a glimpse, a short-term correction that will be followed by significant growth over the next nine to eighteen months, then you also still want to be in private equity, but for completely different reasons. If you think the stock markets are going to take off again, private equity has always shown hundreds of basis points of outperformance against publicly traded indices.

Therefore, when you incorporate private market strategies into creating a public portfolio or allocating assets, you have a much smoother risk profile.

This interview has been edited and condensed.

– Brenda Poe, exclusive to the Globe and Mail

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