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This alternative to stocks and bonds is gaining a following among wealthy investors

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Ted Rechtshaffen: If your portfolio is 100% in publicly traded investments, know that most pension plans think you’re making a mistake

I hear a lot of the following these days:

“The stock market is too volatile and there is a recession coming. I am nervous about stocks.”

“With interest rates so low, I will lose money owning bonds after tax and inflation.”

“Preferred shares have not performed very well over the past few years so I don’t want those.”

What often comes next is a question similar to, “If I don’t want to put money into those, do you have anything else you might recommend?”

As it turns out, we do have a lot that we would recommend, and it generally comes under the category of “alternative investments,” which are not publicly traded on markets. Most of the investments that we have in this area have been providing steady returns in the six per cent to 10 per cent range annually over the past several years.

Before you think that these are some strange and extreme types of investments, it is worth noting that according to Benefits Canada, almost 40 per cent of Canadian pension plans are now invested in alternative investments. The plan managers are doing this for all of the reasons raised in the opening three quotes. They are worried about volatility and risk-adjusted returns from stocks. They are especially concerned that in a low interest rate world, the plans can’t generate the required returns with only traditional conservative government or high-quality corporate bonds.

While alternative investments include infrastructure, commodities and private equity, much of our investment focus is in the areas of private debt and real estate. In a nutshell, private debt is lending that is not done by traditional banks and does not include bonds traded on public markets. Ever since 2008, the banking landscape has changed and their lending strategy narrowed. This left many companies and individuals who required debt to look for alternative sources of funds. Over the past decade, private debt has grown over four-fold and is now close to US$1 trillion in assets globally, according to the alternative credit council. Our real estate investments, meanwhile, tend to be focused on managers that lend to developers and building owners and who have a global reach.

To help understand the increase in interest in alternative investments, and why the returns are higher than most publicly traded bonds, here are some examples of how private debt works. In some cases, the borrowers can be higher risk than traditional banks are comfortable with, but often the borrowers fall into a variety of buckets that banks can’t or won’t service for other reasons.

Examples include a business that requires a loan to close an acquisition. The business may be a perfect candidate for a loan but requires the funds in 3 weeks, while a traditional bank may take 3 to 6 months to approve it. Eventually the company may shift its borrowing to a bank at lower rates, but in the short term, the company is fine paying a high interest rate for the benefit of having the financing completed quickly. In other cases, a company may be in an industry that a bank may not lend to for reputational reasons, but which might otherwise be a great candidate for lending. For personal borrowers, sometimes they are business owners with a lot of assets and good credit, but low personal taxable income. A bank may not give them a mortgage but a mortgage investment corporation may think they are a great loan candidate, especially if they are only lending them 70 per cent of the value of their house, and the house is the first collateral on the loan.

In all of these cases, the borrowing rates would be higher, and often could be anywhere from six per cent to 20 per cent depending on the situation. It is these borrowing rates, along with strong risk management practices and full collateral that can provide steady returns at rates much higher than public bonds. These represent just a few examples of the many situations where someone is willing to borrow at high rates, for the ability to get the lending that they require.

The benefits to the investor are significant. First, they provide investment diversification and very low connection or correlation to the stock market. Second, over the past five years (as many funds were not around prior to this), returns have been quite steady with very low downside volatility. Having said that, a full investment cycle of 10 to 20 years would probably provide a little better test. And third, returns are often relatively high, with many funds providing returns in the six per cent to ten per cent range.

The main negative to private debt investments is that they are not very liquid. While publicly traded securities are often easily sold daily, many private debt investments might require anywhere from 30 days to a full year to redeem. This is one of the main reasons why private debt might only be one component of an overall portfolio. Because the risks on lending are often only as strong as the operational skill of the manager and the security against the loan, it is important to be able to assess whether any particular manager has top level skills to minimize the risk of losses.

While every person is different, in the 2019 investing world, we often have 10 per cent to 35 per cent of a clients’ overall portfolio invested in a diversified mix of private debt and other alternative investments. If your portfolio is 100 per cent invested in publicly traded investments, it is worth noting that many wealthy individuals and most pension plans believe that you are making a mistake. Now may be the time to consider looking beyond traditional investments to meet your long-term goals.

Reproduced from The Financial Post – November 18, 2019.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

A proven path to higher and stable returns

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The global equity markets have been very volatile and have understandably rattled investors confidence. The ‘winds of change’ to one of the longest bull markets have arrived and our portfolio safety metrics are being tested.

At TriDelta we set out to construct conservative portfolios designed to deliver in all market cycles for financial peace of mind.

Investors understandably remain nervous as year end approaches and we expect more volatility as concerns over the China trade deal, elevated market valuations and Brexit uncertainty. Other concerns include the inverted yield curve and rising interest rates that may stall any ‘Santa Claus’ rally this year.

At TriDelta Financial we come well prepared and deliver highly diversified portfolios that typically include a significant allocation to Alternative Investments that include global real estate and private debt.

Alternative investments are essentially any asset that is not a public stock, bond or cash security. Alternative investments often provide higher returns than traditional assets by focusing on less efficient or private asset classes, such as infrastructure and private equity.

They can generate stable, high levels of income by investing in private income oriented investments, such as real estate and private debt. Hedge Funds, such as Market Neutral Hedge Funds can also reduce volatility by using sophisticated hedging strategies.

We have long held the view that traditional equity and bond investment portfolios simply do not deliver consistent wealth accumulation. Portfolios require more diversification to ensure uncorrelated, multi-factor protection against downside risk. We manage our clients wealth in the same way pension funds do by strategically building portfolios that include a number of investment types and strategies.

We use stocks, bonds and preferred shares, but also include Alternative Investments such as global real estate, private debt solutions and hedge funds. Alternative investments compliment and add real value to portfolios by:

  • Provide high income
  • Diversification to reduce risk
  • Lowers portfolio volatility
  • Enhances returns
  • Protects capital during market weakness

The major pension portfolios are constructed in a very similar way. Here is an Extract from the CPP Investment Board 2018 Annual Report on how they diversify and reduce portfolio risk:

Diversifying sources of return and risk – the Strategic Portfolio

As noted, we manage the Investment Portfolio to closely match its total absolute risk with that of the Reference Portfolio. But that does not mean that we simply hold 85% of the Fund in equities, or even in equity-like exposures. This would be imprudent, as the portfolio’s downside risk would be almost completely dominated by a single risk factor – that of the global public equity markets.

We can, however, build a portfolio with a superior return profile for a similar amount of risk by blending a variety of investments and strategies that fit CPPIB’s comparative advantages. Each of these strategies offers an attractive return-risk tradeoff of its own, and their addition clearly reduces the dependence on public equity markets.

First, we can invest in a higher proportion of bonds and add two major asset classes with stable and growing income: core real estate and infrastructure. By themselves, these lower the risk of the overall portfolio. This risk saving then allows us to add a wide variety of higher return-risk strategies, such as:

  • Replacing publicly traded companies with privately held ones;
  • Substituting some government bonds with higher-yielding credits in public and private debt;
  • Judiciously using leverage in our real estate and infrastructure investments, along with increased investment in development projects;
  • Increasing participation in selected emerging markets; and
  • Making significant use of “pure alpha” investment strategies, which rely on the skills and experience of our managers.

CPP Investment Board 2018 Annual Report

To help put the current market turmoil into perspective, here are a few opinions from the large US investment firms:

JPMorgan Chase see the pessimism in equity and high-yield bond markets as overdone, as it sees only a 20% to 30% chance of a recession in 2019, with an increased probability in 2020.

The bank’s strategists, led by John Normand, analyzed equity valuations and credit spreads for high-yield bonds in the period leading up to past economic recessions.

The team continues to favor stocks over corporate bonds in developed markets and takes a neutral view on emerging markets.

“It is right to anchor portfolio strategy in a late-cycle framework that anticipates below-average returns into and through the next recession, but we note it is also excessively pessimistic to price so much downside now as equity and HG credit markets are doing,” the analysts wrote.

Goldman Sachs generally believes the bull market will continue in 2019, but it could get choppier as the year continues and investors begin to worry about a recession in 2020.

Here are some of the investment bank’s predictions for next year:
The S&P 500 will rise 5 percent to 3,000 by year-end 2019 (after closing 2018 at 2,850).
Investors should raise cash.
Investors should be defensive.
The market could be in for big trouble from tariffs.

Bank of America ML believes that “the long bull market cycle of excess stock and bond returns is expected to finally wind down next year, but not before one last hurrah.

Their Research team forecasts 2019 to deliver:
Modest gains in equities.
A weaker US dollar.
Emerging markets are cheap and under owned, they could be a big winner in 2019.
Higher levels of volatility.
A notable slowing in global earnings growth.

Morgan Stanley believes US stocks will underperform and Emerging Market stocks will outperform.

They see a number of macro changes as a result of slowing global growth in US and developed markets, rising rates, higher inflation and tighter policy. They believe these shifts will result in reversals of some key market sectors as follows:
US dollar strength will weaken once the Federal Reserve pauses on rate hikes.
US stocks outperformance will change to underperform.
US and European rates will converge.
Emerging markets have underperformed, but will retake the lead and outperform once China easing starts working.
Value portfolios will start outperforming growth.
Emerging market sovereigns will start outperforming US high yield bonds.

The TriDelta Approach:

TriDelta’s Alternative Assets Investment Committee focuses on putting the odds in our clients’ favour by focusing on:

  • Proven managers with strong track records and disciplined investment philosophies
  • Earning more stable returns
  • Generating premium yield in less liquid investments
  • Solutions that lower clients’ portfolio volatility

It is often difficult for investors to access these investments for three reasons:

  1. Alternative Investments are often restricted only to Accredited Investors (those with family income of $300,000+ or an investment portfolio of $1 million+)
  2. Many large Canadian financial firms simply do not make them available to their clients because alternative investments are often more complex and require a specialized skill set to analyze, review and select managers; and
  3. Many of the best alternative managers provide only restricted or limited access to their funds.

At TriDelta Investment Counsel, we solve all of these problems.

As an investment counsellor, we are able to offer these investments to all clients on a discretionary account basis. Alternative investments are a key element of our overall investment strategy.

Anton Tucker
Written By:
Anton Tucker, CFP, FMA, CIM, FCSI
Executive VP and Portfolio Manager
anton@tridelta.ca
(905) 330-7448

Lorne Zeiler on BNN’s The Street – March 21, 2018

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Investment Counsel, was the guest co-host on BNN’s The Street on Wednesday, March 21st discussing the following:

Income Investing Strategies in the Current Environment

Given the expectations of rising interest rates and renewed market volatility a traditional bond or dividend focused portfolio may be incapable of generating sufficient income at low volatility needed by investors. Lorne Zeiler, Portfolio Manager, discusses how to design a stable, income producing portfolio in this environment on BNN’s the Street.
Click here to view

Keeping Calm and Profiting from Volatile Markets

When markets drop significantly in short periods investors often let emotions take over and make bad investment decisions. Lorne Zeiler, Portfolio Manager, discusses how to take emotions out of investing by designing a stable, diversified portfolio, including alternative assets, on BNN’s the Street.
Click here to view

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Lorne Zeiler on BNN’s Market Call, February 7, 2018

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Financial, was the guest on Market Call last night (February 7, 2018).

Below is a link to Lorne’s top picks, market commentary and past picks

Click here to view

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Lorne Zeiler on BNN’s ‘The Street’, Jan.12, 2018 – TriDelta Fixed Income Fund

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Investment Counsel, was the guest co-host on BNN’s The Street on Friday January 12th discussing the following:

TriDelta Fixed Income Fund Generates 6.5% Return in 2017 (vs. Index return of 2.5%)

The TriDelta Fixed Income Fund generated a 6.5% Return in 2017 (vs. 2.5% for the index). Lorne Zeiler, Portfolio Manager, discussed the benefits of active management in fixed income investing and income alternatives on BNN’s the Street this morning.
Click here to view

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Lorne Zeiler on BNN’s ‘The Street’, Jan.12, 2018 – TriDelta Financial’s 2018 Market Outlook

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Lorne Zeiler, VP, Portfolio Manager and Wealth Advisor, TriDelta Investment Counsel, was the guest co-host on BNN’s The Street on Friday January 12th discussing the following:

TriDelta Financial’s 2018 Market Outlook.

While Equity valuations are quite high (particularly in the United States), we still feel there is more room for the Bull market to run in the short-term, but that the best opportunities may be in Emerging Markets, Europe and Japan. Lorne Zeiler, Portfolio Manager, discusses our views this morning on BNN.
Click here to view

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225
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