Ashleay: Welcome to the “In Your Interest” podcast from iA Financial Group, where we discuss your need-to-know economic news and how it affects your finances. All this in under 10 minutes. Alternative investments. Does that ring a bell? If it doesn’t, at first, that’s normal. What exactly is this alternative investment? My name is Ashleay. I’m here with my colleague Sébastien Mc Mahon, our Chief Strategist and Senior Economist here at iA Financial Group. Hi, Sébastien.
Sébastien: Hi, Ashleay.
Ashleay: So, Sébastien, we’re talking today about investments that our listeners may never have heard of. When we talk about investments, what usually comes to mind are the traditional assets, so stocks, bonds, foreign currencies. But there are other types of assets. Can you tell us more about them?
Sébastien: Indeed, the average person may not know that a significant portion of the assets held by the world’s leading managers are considered non-traditional or alternative assets.
Ashleay: Okay, so what is an alternative investment? Why are they called that way?
Sébastien: Well, these are investments that do not trade on an organized market, such as stocks like in the S&P, TSX or the S&P 500. And they generally have a limited liquidity and they require significant capital. So, for example, investment in infrastructure like telecommunications, wind farms, port terminals, airports or direct investments in these infrastructures. Real estate is another category. So office buildings, rental properties, industrial buildings, shopping centres, we can be talking about mortgages, long-term leases on office buildings, retail tenants, multi-residential buildings for income stability, private equity, purchasing shares in private companies directly from the owners or private debt, direct loans to a company or project financing.
Ashleay: And if they’re not available in the markets, who has access to alternative funds and how do you get them?
Sébastien: Well, as they require a large amount of capital, we’re talking here about several million on average, often more than 10 million a clip, it’s often pension funds of large institutions that invest in non-traditional investments. In short, whether it is through the large public pension funds like the Canada Pension Plan, the Régie des Rentes in Québec or a private portion of a pension fund for the lucky ones that have access to a private pension fund – well, you probably didn’t know that a good part of your savings is invested in alternative assets. On average, the largest Canadian pension funds hold between 40 and 50% in alternative assets.
Ashleay: Wow. Okay. So 40 to 50% is a lot. There must be some significant benefits then.
Sébastien: Yeah. Alternative investments generally have a few advantages. The first one is low correlation, meaning that they’re not exposed to the volatility of traditional assets like stocks and bonds. So, for example, if there is volatility on the stock market, you should not expect some volatility in the price of your investment in the wind farm. Second, superior yield potential, meaning that you have access to promising projects before the general public. Third, protection against inflation, since their income is often tied to the consumer price index or the CPI, for example, often there are some contracts that are indexed to inflation, like real estate, like rents are indexed. So you have a few significant advantages.
Ashleay: And there must be some disadvantages as well.
Sébastien: Of course, nothing’s perfect. So there is, let’s say, higher complexity and often very low liquidity. So by liquidity, we mean that if you want to sell your position in an alternative investment, it’s going to take weeks, months or even quarters. So it’s not like just pressing a button. You need a longer investment horizon because, again, positions cannot be redeemed daily. Generally, they’re pretty complicated investment structures and they have complex risk-return profiles. They need, as you mentioned before, higher overall investment minimum. They usually bring to your portfolio a unique risk profile that you need to master before investing. And it’s short. It’s best to leave this to the seasoned investors and the large management firms.
Ashleay: Right. But okay, so is it just for pension funds or can anyone have access to it?
Sébastien: Well, it’s not as easy to add to your portfolio as traditional assets, but they’re available via certain exchange-traded funds. And here at iA, some funds that I’m involved in managing, like the Global Asset Allocation Funds, have direct allocation to alternative assets to about 15% of the funds. So there are options.
Ashleay: So should everyone hold alternative investments?
Sébastien: Alternative investments are not suitable for all investor profiles, given their risk and return characteristics, as well as the complexity of their investment features. Alternative investments often appear more attractive and better suited to seasoned and affluent investors. Beyond the minimum investment thresholds and suitability requirements, investors must consider their investment objectives and time horizon as well as their liquidity needs. So, remember – to wrap this up – this is an important part of the portfolios of large pension funds. It’s very useful for investors with a long-term horizon. You probably hold a lot more than you thought you did, if only through public pension funds. There are good options to adding alternative investments to your portfolio if you want to manage your own assets. And if you want to learn more about alternative investments, as always, talk to your financial advisor.
Ashleay: Fantastic. Thank you so much, Sébastien. We’ll talk to you soon.
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