Given the volatility of the public equity markets, the accepted strategy for many in order to provide returns with greater consistency has been to focus on cash-flow, specifically dividend paying stocks and an allocation to interest generating fixed income securities. While this has provided some comfort, more can be done to reduce the issue of inconsistent returns and uncomfortable fluctuations in the market value of an investor’s portfolio along with improving the return potential and increasing the likelihood that an investor’s goals and objectives are met.
To combat this issue, where appropriate, Northland Wealth has been utilizing “alternative investments,” which have the potential to reduce overall portfolio investment risk by providing additional diversification and thus improve portfolio returns.
The question becomes "What are Alternative Investments?"
Alternative Investments are essentially investments that do not fall into one of the three traditional asset classes (stocks, bonds, and cash). These solutions are favoured mainly because their returns have a low correlation with those of standard asset classes. As a result, many large institutional funds such as the Canada Pension Plan (CPP) as well as private endowment funds such as Harvard & Yale have begun to allocate a significant portion of their portfolios to alternative investments.
The range of alternative investments, while extensive, tends to allow investors to participate in strategies that are not available to the general public. However, it is important to keep in mind that while these strategies may offer a higher return potential, or a different return profile, there are some risk factors that must be taken into consideration, such as lack of transparency, less regulation or reduced liquidity versus public market investments.
For these reasons, Northland Wealth Management completes extensive due diligence, to analyze and understand fully all facets of any investment, prior to allocating any portion of a client’s portfolio to them. The following is a brief summary of a few strategies that we are employing currently:
Private Real Estate Investment Trusts (REITs): an investment which offers investors a professionally managed and diversified portfolio of rental apartments in Canada and participation in the profits derived from them. Investment in Private REITs allow for tax-efficient returns, with greater consistency, as compared to the often volatile stock market.
Credit Strategies: hedge funds which actively managed bond portfolios, utilizing advanced credit strategies, that take long and short positions, can provide additional diversification compared to traditional bonds, targeting consistent returns and maintaining an emphasis on capital preservation.
Private Mortgages: a consistent monthly income source secured by a managed portfolio of commercial mortgages which is prudently underwritten to safeguard investor capital.
While alternative investments carry a number of unique advantages, they are not necessarily the right choice for everyone.
To discuss what role alternative investments should play in your portfolio, please feel free to contact us.