The Rise of Alternative Investing

Over the past few years, a new category of investments has emerged and become more mainstream. “Alternative investments” refers to a wide range of types of investments and investment strategies used to increase diversification and potentially decrease volatility and downside risk in a portfolio. Generally speaking, an alternative investment is anything other than a publicly traded stock, bond, mutual fund or ETF. Most diversified investment portfolios contain a mix of different publicly owned stocks and bonds (and sometimes just one or the other), with the strategy that if stocks go down in value, bonds usually will go up, and vice versa. The problem with this is in years like 2022 where stocks and bonds both go down in value, diversifying with only stocks and bonds loses effectiveness. Enter alternative investments, which adds additional types of assets that can provide positive returns when both stocks and bonds are both falling in value.

What are some examples of alternative investments?

Private Equity - Traditionally reserved for wealthy and well-connected investors, it is now becoming more broadly available. Private equity simply refers to investing in a company that doesn't have a publicly traded stock. Examples range from emerging companies like OpenAI, creator of ChatGPT, to well-known companies like Lego.

Real Estate - People often debate if they should invest for retirement or put their money into real estate, and many people do both by investing in RRSPs and/or TFSAs, while also paying the mortgage on their home. Real estate investments can include owning the companies that own office buildings and apartment/condo complexes, or earning income by lending to companies that are building commercial or residential real estate.

Infrastructure - Providing essential services to society and generally recession-proof, infrastructure companies are increasingly the acquisition target of large pension plans looking for stable and high-quality companies. Infrastructure companies are another asset class within the alternative investment category, and can include both public and private companies.

Stock Options - Strategies such as writing options to generate income can be an attractive alternative to traditional bonds. Yields that exceed many bonds can be achieved, without the downside risk to principal that bonds have when interest rates rise. Proper risk management is essential though, and it is best left to a dedicated professional.

Commodities - A wide range of and commodities make up additional markets that can be used to diversify a portfolio and earn a return. Gold, oil, copper, lumber, wheat, and coffee are all examples of commodities that have markets where investors can attempt to make a profit on prices going up or down, or by owning the physical good.

Farmland - Not only does farmland grow the crops that makes the food that feeds us and the rest of the world, it has grown tremendously in value over the past years and decades. Up until recently, owning farmland has not been accessible to most people, but mutual funds and ETFs have been created that own farmland as their underlying investment.

Carbon Offset Credits - As carbon tax schemes are being introduced around the world, and aggressive long-term carbon reduction goals are being set, markets have also been created to buy and sell carbon offset credits. Normally purchased by companies to offset their carbon emissions (to become "carbon neutral"), they can also be bought as investments if you expect the price or value of those credits to increase over the long run.

Alternative investments often have unique characteristics that differ from traditional investment. Some of these include:

Liquidity Risk - some alternative investments, specifically private equity and private credit, aren't traded on public markets and may be difficult to sell or redeem when markets are in decline. In extreme scenarios, redemptions may be restricted for a period of a few months or indefinitely. The term “Liquid Alts” refers to liquid and publicly traded mutual funds or ETFs that hold less-liquid alternative investments within it.

Valuation frequency - unlike publicly traded stocks and bonds that change value daily, private equities and credit may be valued much less frequently. This can be just once every 3-6 months, and can lead to sudden changes in price when re-valued.

Eligibility - alternative investments can often be more exclusive, with specific eligibility requirements that need to be declared before you can invest in them. Being an Eligible or Accredited Investor usually requires having a certain income level, net worth, or knowledge level to be eligible to invest.

Last year brought about renewed talk about the death of the 60/40 portfolio, but it likely won't be the end of them, and portfolios will likely recover once inflation and interest rates start to come back down to more regular levels. However, it should highlight the importance of diversifying beyond traditional stocks and bonds, and result in an uptick in the percentage of alternative assets making up investors' portfolios.

This is a trend that has been playing out at the institutional level, as many large pensions plans are continually increasing their exposure to alternative investments. For example, the Canada Pension Plan had approximately 50% of its assets allocated to alternatives (private equity, infrastructure and real estate) as of their 2022 annual report.

If you would like to learn more about increasing the diversification in your portfolio with alternative investments, please contact me at Dennis.Rubeniuk@Endeavourwealth.ca.

- Dennis Rubeniuk, Investment Advisor

Dennis Rubeniuk is an Investment Advisor at Endeavour Wealth Management with iA Private Wealth Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Dennis Rubeniuk who is an Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.

‍