“To expect the unexpected shows a thoroughly modern intellect.”- Oscar Wilde
This year will provide investors many new lessons to reflect on
While the wise words of the late Irish poet and playwright probably ring true for most investors. The unraveling of events this year have likely tested the aptitude of the best and brightest. Who could have anticipated that a global pandemic would shuttered global economic activity this spring? Also, who could have expected markets to be filled with optimism only months later, while millions of people remain unemployed and with no timetable on when life returns to normal. This year will undoubtedly provide investors many new lessons to reflect on; however the benefits of portfolio diversification once again have proven to be constant source of value.
Who should be considering alternative investment?
While the market mayhem exacerbated by the health crisis that arrived in March seems like a distant memory, the current situation is far from ideal. The pandemic has created an uncertain environment, raising the possibility of a dispersion of investment returns, and reinforcing the need to seek diversity in portfolios. Furthermore, a decade of low interest rates and the massive fiscal stimulus programs in response to the health crisis has pushed valuations for traditional investments to rise well above historical levels. We believe that investors with the appropriate risk profile and time horizon should be considering alternative investments.
What are alternative investments?
Most investors are familiar with traditional investments such as stocks and bonds that are commonly held in balanced portfolios. Alternative investments include asset classes such as real estate, private equity and infrastructure, as well as alternative strategies used by hedge funds that invest in public equity and credit markets.
What is the benefit of alternative investments?
The appeal of adding alternative investments to portfolios is that they typically have a low correlation to traditional assets therefore providing excellent diversification benefits. In addition, the return profile of many of alternative investments are attractive relative to stocks and bonds. This benefit is offset by the fact that they are also less liquid than traditional assets, requiring investors to have a longer time horizon. Lastly, management fees associated with alternative investment are typically higher than traditional investments due to the complexity of implementing the strategies.
For our clients that can tolerate the risk factors associated with having an allocation to alternative investments, we construct alternative portfolios to gain exposure to asset classes like industrial real estate, private equity, as well as market neutral equity strategies. The objectives are to ensure that the investments have a low correlation to traditional assets in the portfolio, and strong conviction that the strategy can deliver attractive long-term risk-adjusted returns.
Farmland? Yes! An example of an alternative investment
One alternative investment that we believe captures many the attractive aspects of non-traditional assets is farmland. First, research has shown that historically the value of Canadian farmland has been uncorrelated to the economic cycle and has a low correlation to bond values and a negative correlation to North American equity markets. Second, the historical long-term return profile for Canadian farmland is also appealing with returns that have been competitive with equity markets, but with considerably less volatility. Lastly, farmland investments have not be overly monetized like much of the real estate market, providing investors with less competition to generate attractive returns.
In a post-COVID world we believe that Canadian farmland has a number of attractive qualities. A concern for a growing number of investors is that that the massive stimulus programs ushered in to deal with the health crisis will trigger a rise in inflation. Farmland provides a positive correlation with inflation as rising food prices provide support to underlying farm values. Farmland also offers the opportunity to capture the productivity gains from implementing new technologies on farms. Canadian farm productivity has outpaced productivity gains from the overall economy with the introduction of new technologies, increased capital investment, and through consolidation that improves scale in farming.
Alternative Investments – a tool to help ensure your long-term investment objectives are met
We are certain to experience a host of unexpected outcomes in the coming years that will have both negative and positive impacts on investment portfolios. This recognition should encourage investors to continuously focus on diversifying and avoiding making herd-following decisions. Considering alternative investments is one way to ensure you meet your long-term investment objectives. Contact your investment advisor to learn more.