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The recent stock market downturn has advisors revisiting strategies that could protect investors from losing a chunk of their portfolios’ value. For some, the answer is alternative investments such as private equity and 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 Mackenzie Northleaf Global Private Equity Fund, its fourth private markets 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 be considering them as part of their clients’ portfolios.
What exactly are alternative investments?
Alternatives, at a high level, fall into three buckets: alternative strategies, meaning those that use shorting 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 specialty finance.
Why should advisors be incorporating alternatives into their clients’ portfolios?
We feel that it’s essential for retail investors to have access to private markets.
Alternatives are important because they can help dampen the volatility in an overall portfolio and they can extend the opportunity set for investors. They provide strong expected returns and lower volatility, untapped diversification and institutional quality management. Consider that publicly traded companies represent only about 2 per cent of global companies, which means 98 per cent of them are private. That in itself demonstrates the opportunity of private markets for retail investors.
What are the risks?
With any investment, manager selection is a risk. You have to look for managers who are experienced with a longstanding repeatable investment process and who know how to invest over different market cycles. There is also liquidity risk with private assets. You can’t get in and out of these funds on a daily basis.
How should advisors use alternatives in clients’ portfolios?
How they’re used depends on what their advisor believes is most appropriate for a client given their age and overall financial plan. Whether they should have more credit or more infrastructure or more equity – or equal slices of all three – that’s up to the advisor.
How should advisors use alternatives amid the current stock market downturn?
Advisors should consider alternatives regardless of what they think will happen in the stock markets.
For example, if your view is that we’re in for high volatility and declining stock markets, longer term, then you want to be in private equity, which has always exhibited significantly less downside and lower volatility than publicly traded securities.
If your view is that this is just a blip, a short-term correction that will be followed by significant growth over the next nine to 18 months, then you also still want to be in private equity, but for very different reasons. If you believe stock markets are going to take off again, private equity has always exhibited hundreds of basis points of outperformance versus publicly traded indexes.
So, when you infuse 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, special to the Globe and Mail
Must-reads from Globe Advisor this week
Major asset managers want a bigger share of thematic ETF market
Thematic exchange-traded funds (ETFs), which have seen dramatic growth over the past decade in North America, are poised to explode in popularity in the coming years. These funds, which focus on market niches versus traditional industry sectors, have been the playground for smaller, startup firms. But giant asset managers now want a bigger slice of this pie. Shirley Won reports on the new trends that have resulted in products and what players like BlackRock Inc. plan for this space.
Top reasons why the CRA may review or audit tax returns
If the 2022 tax season is like most years, about three million Canadians will receive a notice from the Canada Revenue Agency (CRA) that their income tax returns are being reviewed. In most cases, the review will request supporting documentation for a specific claim, deduction, or income amount. But the CRA does conduct reviews according to an undisclosed scoring system that identifies returns with “the highest potential for inaccuracy.” Dale Jackson digs deeper into which scenarios would most likely grab the attention of the government.
How the automotive supply chain crisis is an opportunity
Collapses in the global automotive supply chain have spawned a crisis among carmakers, but experts say the same issue now represents a rare chance to get into the sector long-term. Gains in production efficiency, combined with pent-up consumer demand and the elimination of costly dealer incentives, have allowed automakers to expand profit margins and focus more production on higher-margin vehicles. Jameson Berkow reports on how investing in a phase of heavy contraction can reward investors when stocks outperform “wildly” in a recovery.
How to navigate the emotional minefield of transitioning the family cottage
For many Canadians, the family cottage is much more than a financial asset – it’s home to years of cherished memories and a much-needed respite from busy city living. Even asking the question – “What will we do with the family cottage?” – evokes powerful emotions from family members. Alexandra Horwood of Richardson Wealth breaks down why family dynamics, affordability, maintenance, scheduling and spouses all need to be considered when transferring the property to children.
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Regulator rules PI Financial owner obtained loan fraudulently
Canada’s securities watchdog has found that Gary Ng, the former owner of PI Financial Corp. and a former co-owner of Bridging Finance Inc., committed fraudulent conduct with loans he used to finance the purchase of several investment advisory firms. The Investment Industry Regulatory Organization of Canada published a notice this week saying a penalty hearing for Mr. Ng is scheduled for May 27. Clare O’Hara and Greg McArthur report on the fallout from the case.
How to control your emotions as markets tumble
Perhaps the most important part of investing is being able to manage your emotions. When markets aren’t in the news, we rely on our brains. When markets are flashing red, our stomachs can take over. Preet Banerjee of Wealthscope shares mental scripts and examples to help manage emotion and stick to your investment plan.
Regulator to tighten mortgage-HELOC rules to curb rising debt
The trendiest type of home equity line of credit is in the crosshairs of Canada’s banking regulator, which is looking to curb risky borrowing as rising interest rates put added pressure on heavily indebted homeowners. The product under scrutiny is the readvanceable mortgage – a traditional mortgage combined with a line of credit that increases in size as a customer pays down the mortgage principal. James Bradshaw and Rachelle Younglai explain why the regulator is keeping a close eye on this combined loan program.
– Globe Advisor Staff
Tense diplomatic relations may not impact trade, investment ties between India, Canada: Experts
NEW DELHI: The tense diplomatic relations between India and Canada are unlikely to impact trade and investments between the two countries as economic ties are driven by commercial considerations, according to experts. Both India and Canada trade in complementary products and do not compete on similar products.
“Hence, the trade relationship will continue to grow and not be affected by day-to-day events,” Global Trade Research Initiative (GTRI) Co-Founder Ajay Srivastava said.
Certain political developments have led to a pause in negotiations for a free trade agreement between the two countries.
On September 10, Prime Minister Narendra Modi conveyed to his Canadian counterpart Justin Trudeau India’s strong concerns about the continuing anti-India activities of extremist elements in Canada that were promoting secessionism, inciting violence against its diplomats and threatening the Indian community there.
India on Tuesday announced the expulsion of a Canadian diplomat hours after Canada asked an Indian official to leave that country, citing a “potential” Indian link to the killing of a Khalistani separatist leader in June.
Srivastava said these recent events are unlikely to affect the deep-rooted people-to-people connections, trade, and economic ties between the two nations.
Bilateral trade between India and Canada has grown significantly in recent years, reaching USD 8.16 billion in 2022-23.
India’s exports (USD 4.1 billion) to Canada include pharmaceuticals, gems and jewellery, textiles, and machinery, while Canada’s exports to India (USD 4.06 billion) include pulses, timber, pulp and paper, and mining products.
On investments, he said that Canadian pension funds will continue investing in India on grounds of India’s large market and good return on money invested.
Canadian pension funds, by the end of 2022, had invested over USD 45 billion in India, making it the fourth-largest recipient of Canadian FDI in the world.
The top sectors for Canadian pension fund investment in India include infrastructure, renewable energy, technology, and financial services.
Mumbai-based exporter and Chairman of Technocraft Industries Sharad Kumar Saraf said the present frosty relations between India and Canada are certainly a cause for concern.
“However, the bilateral trade is entirely driven by commercial considerations. Political turmoil is of a temporary nature and should not be a reason to affect trade relations,” Saraf said.
He added that even with China, India has acrimonious relations but bilateral trade continues to remain healthy.
“In fact, bilateral trade is an effective tool to improve political relations. India must make special efforts to increase our bilateral trade with Canada,” Saraf said.
India and Canada have a strong education partnership. There are over 200 educational partnerships between Indian and Canadian institutions.
In addition, over 3,19,000 Indian students are enrolled in Canadian institutions, making them the largest international student cohort in Canada, according to GTRI.
According to the Canadian Bureau for International Education (CBIE), Indian students contributed USD 4.9 billion to the Canadian economy in 2021.
Indian students are the largest international student group in Canada, accounting for 20 per cent of all international students in 2021.
Benefits of educational partnerships are mutual and hence the current situation may have no impact on the relationship, Srivastava said.
Apple supplier Foxconn aims to double India jobs and investment
Apple supplier Foxconn aims to double its workforce and investment in India by next year, a company executive said on Sunday.
Taiwan-based Foxconn, the world’s largest contract manufacturer of electronics, has rapidly expanded its presence in India by investing in manufacturing facilities in the south of the country as the company seeks to move away from China.
V Lee, Foxconn’s representative in India, in a LinkedIn post to mark Indian Prime Minister Narendra Modi’s 73rd birthday, said the company was “aiming for another doubling of employment, FDI (foreign direct investment), and business size in India” by this time next year.
He did not give more details.
Foxconn already has an iPhone factory employing 40,000 people in the state of Tamil Nadu.
In August, the state of Karnataka said the firm will invest US$600 million for two projects to make casing components for iPhones and chip-making equipment.
The company’s Chairman Liu Young-way said in an earnings briefing last month that he sees a lot of potential in India, adding: “several billion dollars in investment is only a beginning”.
Taiwan election: Foxconn’s Terry Gou taps star-powered running mate
Last month, Foxconn’s billionaire founder Terry Gou said he would run for the Taiwanese presidency in next year’s election, as an independent candidate.
He said the ruling and independence-leaning Democratic Progressive Party (DPP) was unable to offer a bright future for the island and left Foxconn’s board following his decision to run.
The firm operates the world’s largest iPhone plant, in the city of Zhengzhou in Henan province.
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