Want returns? Choose alternative investments

Date: Monday, November 24, 2014
Author: Jacqueline Louie, Advisor.ca

Everyone’s looking for an edge. And for investors, that can mean choosing non-traditional strategies and asset classes.

Managed futures, real estate, and timber funds were among the alternatives explored during a panel session at CFA Society Calgary’s recent Wealth Management Conference.

Read: Add alternatives to client portfolios

According to panellist Tim Pickering, chief investment officer at Auspice Capital Advisors, the Canadian wealth management community traditionally focuses on equities and fixed income.

But that’s not the case among global asset managers, Pickering says. “They’re moving away from traditional 60-40 stocks and bonds to a large core component that’s alternative.”

He predicts non-correlated alternative investments will eventually be core holdings for most investors, regardless of size or sophistication. “This is a sector that has been around for 30 years [with] very poor acceptance in Canada,” he says, noting that our country is at least 10 to 15 years behind the rest of the world.

Read: Think outside the commodities box

“If you want to protect yourself from another pullback in your portfolio, [use] non-correlated assets. If your portfolio is in fixed income and equities, when the market pulls back you are going to get very hurt again.”

According to panellist Andrew Moffs, president and portfolio manager at SRE Securities Canada, “Any product that can deliver superior risk-adjusted total returns with low volatility [should be added] to any portfolio.”

Moffs’s firm, which manages long-short hedge funds in publicly traded real estate securities, “is agnostic to where we are in the real estate cycle. […] We don’t take on any undue risk in trying to time the market.”

Read: Faceoff: REITs versus the real thing

He adds the rising tide for REITs and any interest-sensitive security will soon be over. “Bottom-up security selection will be crucial,” he says. “When choosing your managers, you want to have a keen eye on what those managers’ competitive advantages are, and their ability to navigate what will be a tougher environment going forward.”

Publicly traded timber investments are another option, says John Duncanson, portfolio advisor at Capital Innovations. His firm manages three globally focused funds in infrastructure, agriculture and timber.

Read: Wood you buy this investment?

“The benefit of listed timber investments include providing liquidity, diversification, valuation and daily market pricing, as well as transparent corporate governance and active management,” says Duncanson, who says investing in listed timber companies provides some unique revenue components.

He points to three: “[First,] trees get bigger as they age, and the bigger the tree, the more valuable it is. Second, is timber price changes; and third, which is really why we think timber is an excellent inflation hedge, is that the land underneath the timber is owned by these companies, so you get the land value increasing over time as well.”

Read: Actively manage infrastructure investments

A seven-year forecast of various asset classes by independent forecaster and economist Jeremy Grantham, of Grantham Mayo Van Otterloo & Co., compares timber to U.S. and international bonds and U.S., international and emerging market stocks.

“Of all the asset classes, the best return he forecasts is in timber,” Duncanson notes.