A yield-focused fund that enhances your liquid alts toolbox

Mackenzie Investments head of alternatives explains the benefits of applying leverage to low-vol asset classes

A yield-focused fund that enhances your liquid alts toolbox

The amount of assets in Canadian liquid alts could reach $100 billion in a few years as more products come to market and investors’ awareness grows.

That’s the view of Michael Schnitman, head of alternative investments at Mackenzie Investments, who believes the ability to invest in products that are not at the mercy of market direction is a boon for advisors.

With liquid alts having achieved nearly $12 billion in assets since the rules opened up in Canada, he believes that at 10% the size of the American market, which stands at $750 billion, Canada has ample room for growth.

The Mackenzie Alternative Enhanced Yield Fund is approaching its one-year mark and is a classic example of how liquid alts have opened up new strategies to retail investors. The fund seeks to provide a consistent and attractive source of income by investing in a diversified portfolio of yield-focused asset classes. It aims for a yield of 5% or higher, while maintaining strict diversification.

Schnitman told WP the fund has a fixed-rate annual distribution of 5%, paid monthly, and is an actively managed product. Crucially, it applies leverage to the lower vol asset classes, which enhances yield without amplifying the overall portfolio risk.

“This really helps investors who are looking for an avoidance of excessive concentration in risky assets when they invest for income,” Schnitman said. “It can complement an income-focused balanced portfolio for some income-focused investors.”

With low interest rates, fixed income is a challenge for advisors, particularly those servicing retiree clients. The enhanced yield fund is 45-65% in fixed-income related asset classes and then 35-55% in equity related asset classes. The latter could include yield providers like Master Limited Partnerships, listed infrastructure, preferred shares, mortgage REITs or global REITs, for example. The fixed income side might feature bank loans, emerging markets debt, private debt, global intermediate and long investment grade, global and U.S. high yield.

Schnitman said: “With those strategies, and asset classes, we apply the leverage on the less risky asset classes. That’s what enables us to generate that fixed-rate distribution of 5%, while at the same time minimizing concentration.”

The ability to short means retail investors now have similar strategies at their fingertips as large institutions to generate returns. However, Schnitman stressed that his fund is not an absolute return-oriented strategy, or a guaranteed product, but a yield-focused strategy that can complement an income-focused, balanced portfolio.

With some in the industry forecasting an income crisis, as people live longer and bonds continue to struggle to provide that return, this is particularly relevant for those people in the retirement phase.

He said: “What we do is target the application of leverage to boost yield in a risk conscious manner so liquid alts can help for retirement-focused investors who want to boost yield a bit further in a risk conscious manner. The liquid alt’s set of capabilities allow that to be implemented.”

He added that when the market corrects sharply, like it did last March, it can hurt clients’ sequence of returns and their nest eggs.

“If we have a sharp downturn, an absolute return-oriented portfolio can help manage that sequence of return risk for a retirement-oriented investor by providing balance and stability to the overall portfolio. Liquid alts are a germane and fundamental component to an appropriate accumulation and decumulation retirement planning strategy.”