Connect with us

Investment

Why illiquid investments are all the rage and what you need to know about their risks – Financial Post

Published

on


You need two ingredients if you want to earn a return above a risk-free investment such as a GIC or government bond: risk and time.

There are four types of investment risk: interest rate and credit (or default) risk relate to the fixed-income market; equity (or ownership) risk is the one investors are most familiar with (i.e., stocks can go down); and the final one, liquidity, which by contrast is poorly understand and worth a deeper dive.

In simple terms, liquidity risk involves sacrificing the ability to sell an investment when you want (daily, weekly or monthly) in exchange for a higher expected return. If you have two identical securities, one that trades daily and the other that can’t be sold for five years, you’d only buy the latter if it had much higher potential.

Sacrificing liquidity is a valuable investment strategy since not all your holdings need to be easily tradeable.

I first learned this from my former partner at Phillips, Hager & North, Tony Gage, who was Canada’s dean of bonds in the 1990s. Gage loved to own “off the run” Government of Canada bonds as opposed to benchmark bonds that were actively traded by brokers. The off-the-runs still had a government guarantee, but offered a slightly higher yield because they weren’t as easy to trade in large amounts — less liquid, in other words. He wasn’t taking additional interest rate or credit risk, but instead sacrificed liquidity for extra return.

Risk versus the reward

How much extra return is required to justify an investment depends on the type of security and how illiquid it is. Small-cap stocks trade erratically so investors expect to buy at a lower price-to-earnings multiple and thus achieve a higher return. High-yield bonds are similar.

Even higher risk premiums are required when buying private companies that don’t trade on an exchange. This is generally done through professionally managed funds that have fixed terms of 10 years or more. In other words, investors have a limited ability to get out (without penalty) prior to the fund’s maturity. Funds may also hold mortgages, loans, real estate, infrastructure and more esoteric investments such as farmland, timber and catastrophe bonds.

Beware the mismatch

The growth of private equity and debt has been a defining feature of this market cycle. Institutions have steadily increased their holdings and even individual investors are getting into the act. Indeed, the proliferation of mutual fund-like products has led to concerns about a growing mismatch: liquid funds investing in illiquid assets.

Freddie Lait, managing partner of U.K.-based Latitude Investment Management LP, put it this way: “Illiquidity is a risk which has been mispriced over the past 10 years as quantitative easing programs have flooded financial systems with cash, and regulators have allowed funds to run liquidity mismatches in their portfolio.”

The potential downside of this mismatch was on full display last year in Lait’s hometown of London. The most intriguing case involved a high-profile manager, Neil Woodford, who, as a headline in The Guardian put it, went from “Bright star to black hole.”

Woodford managed a number of large funds and went through a period of poor performance. But he couldn’t accommodate the withdrawals when investors turned against him because he held too many unlisted companies. To protect existing holders, the funds were closed to redemptions, or “gated,” in hopes the funds could be wound down in an orderly manner.

Such situations are rare when the world is awash with capital and markets are strong, but we’ll see more gates close in the coming years as more mismatched products come to market.

How to benefit from illiquidity

If investors want to take advantage of the fourth risk and avoid a mismatch, they can’t go halfway. These investments need to be truly illiquid. Investing in private companies, real estate, infrastructure, loans and mortgages requires you to provide the fund manager with long-term capital that matches the task. You don’t want to invest alongside others who can leave at a moment’s notice and force the sale of assets at an inopportune time.

It’s also important to target asset types that you’re comfortable owning for a long time and pick a manager who will be around for a decade or more. That’s because the time component of the risk plus time formula is locked in. You’re going to have the investment in your portfolio for a long time.

Financial Post

Tom Bradley is chair and chief investment officer at Steadyhand Investment Funds, a company that offers individual investors low-fee investment funds and clear-cut advice. He can be reached at tbradley@steadyhand.com.

Let’s block ads! (Why?)



Source link

Continue Reading

Investment

Varcoe: Risks rising on Alberta's multibillion-dollar pipeline investment – Calgary Herald

Published

on


Article content continued

The Dakota Access ruling has also shown that even existing pipelines can face legal uncertainty.

“Even if you have the pipeline running and in service, they can ask you to get rid of it,” said Coleman.

Despite the potential pitfalls ahead, other experts feel the gamble is worth it.

Richard Masson, former CEO of the Alberta Petroleum Marketing Commission, believes the rationale behind the investment still stands.

Demand for Canadian heavy oil remains strong with Gulf Coast refiners, while competing production from Venezuela and Mexico has dwindled.

The province decided to use its only leverage — its commercial options — to propel the project ahead.

“The fundamental business case is there,” Masson said.

“On balance, it’s a big risk decision, but . . . I would still say it’s the right call. We need Keystone XL.”

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com

Let’s block ads! (Why?)



Source link

Continue Reading

Investment

UCP government to use grants to attract petrochemical investments to Alberta – Globalnews.ca

Published

on


The UCP government has introduced a new incentive program it believes will attract billions of dollars worth of investment in the petrochemical sector, employing tens of thousands of Albertans.

The Alberta Petrochemicals Incentive Program will offer direct grants to companies that decide to invest in Alberta. Companies will qualify if their facilities are up and running by 2030.

“The sky is the limit for the benefits this industry can provide to Alberta,” Associate Minister of Natural Gas and Electricity Dale Nally said while announcing the program.

“Beginning now, we’re going to set our sights much higher.”

The new program won’t be a competition. All projects that meet requirements set out by the province will be eligible to receive funding. Those details are still being worked out, and it’s not known how much money the government will end up paying out.

Story continues below advertisement

“From our perspective, if we’re getting return on investment that we need, and we’re getting billions of dollars of infrastructure development happening — and of course resource revenues for Albertans — then we’re not going to put a hard stop on it,” Nally said.

READ MORE: Canadian petrochemical growth spurt expected despite rising desire for fewer plastics 

That answer isn’t good enough for NDP Leader Rachel Notley, who believes an announcement without details can’t be considered a clear plan.

“This minister had almost nothing to do for the last 15 months, and to bring forward an announcement like this, with so little information, I ask the question, what has he been doing?”

While in government, the NDP brought forward a number of petrochemical diversification programs itself, including one that uses royalty credits to attract investment. The second phase of that program is still ongoing.

The industry itself believes this new program will be successful, and could attract $30-billion worth of investment over the next decade.

“Our members are looking at tens of billions of dollars of projects right now,” said David Chappell, the board chair of the Resource Diversification Council. He is also a senior vice-president with Inter Pipeline.

“As companies spend tens and hundreds of millions of dollars on projects, before they decide whether they go ahead or not, they can count on this in their economics.”

Story continues below advertisement

According to the Chemistry Industry Association of Canada, the chemicals sector in Alberta is already worth more than $12 billion, and directly or indirectly employs more than 58,000 people.

© 2020 Global News, a division of Corus Entertainment Inc.

Let’s block ads! (Why?)



Source link

Continue Reading

Investment

Benefits of investing in a Registered Education Savings Plan RESPs

Published

on

A registered education savings plan (RESP) is widely known for the benefits it provides and its versatility in being able to use it whenever the need crops up. However, there are many other benefits of investing in these accounts that can help you in getting returns in the long run. Let us have a look at the most prominent benefits of investing in RESPs.

Investing in the registered education saving plan is a safe way to save funds for the said purpose. Let us consider why you should invest in RESPs.

Aided by the government – The federal government, through the Canada Education Savings Grant, adds 20% per dollar to your savings, with an annual limit of $ 500. The maximum limit for a lifetime is $ 7,200 per child. In the case of families with a lower income, choosing to invest in such funds can be a great deal. Henceforth, anyone eligible as per the rules and regulations can apply for it.

Taxable in the hands of the beneficiary –

When the beneficiary/child enrols for any post-secondary education program, they are eligible to get access to payments (also known as – educational assistance payments) from their funds. These payments are composed of a specific investment income and government grants.

Also, the tax on these assistance payments remains taxable on the hands of the person registered as the beneficiary. It is a strong possibility that the students do not have their income and are likely to fail to pay tax on such payments. However, the RESP withdrawal transactions are kept charge free. Learn more about taxes and RESPs here.

Flexibility in transfer –  RESPs can be a great alternative; then, you need to do the funds from your registered education savings plan to your registered retirement savings plan (RRSP).  As per the rules, you’re allowed to transfer $50,000 from your RESP funds to your retirement savings plan. Hence, the amount is freely transferable.

Easy setup – Easy access and set up is another great benefit of investing in the registered education savings plan. Almost anyone can set up an individual account for their child. The funds can grow faster when additional contributions come from friends and other family members when the contributions make the funds sustain for long.

Longevity – There are chances that the beneficiary may choose to defer their education plans once they pass high school. Since the funds in RESPs are accessible for a period of 36 years, they can utilize the funds whenever they feel like giving it a start. However, it is always advisable to go through the rules to ensure that there are no specific restrictions on this.

How do RESPs work?

RESP is an account that enables you to initiate investing for your child’s post-secondary education. In each case, the government contributions are subject to taxation only if they are withdrawn or paid for the beneficiary. As long as the recipient takes enrollment in any academic program, the fund is for the beneficiary.

The fund is to aid expenses for part-time or full-time studies in any academic program. It can be for trade, school, college or university. However, this payment entirely depends upon the RESP contribution made by the account holder into the RESP account. Also, the required contributions should be regularly made into a Registered Education Savings Plan to gain government grants.

It is important to note that as long as there is an appropriate confirmation of admission or enrollment in an educational program, the accumulated funds are for his purpose. Also, you can support the miscellaneous expenses for the education of the beneficiary using this fund. Hence, most certainly, almost anyone can open an RESP account for a child, naming them as the beneficiary.

Government Grants and RESPs

 

Since it is a government-aided fund, there are various benefits of it. However, there are several downsides to an RESP that should be known to anyone who intends to open an account in it. For example, if the child decides not to attend the college or university, the government will gets back its funds. However, the account holder can keep the funds belonging to his share, or any money made out of it.

Continue Reading

Trending