With markets taking a hit and investors looking for safe-haven assets, what alternatives can provide solutions?
The COVID-19 crisis has sent shockwaves through many areas of the financial markets. For advisors who may not have looked towards alternatives asset classes in the past, many may be asking if now is the right time and what they should consider.
While some areas have performed better than others, the experts at MacNicol and Associates, an asset management and advisory firm with an extensive background in alternatives, examined some of the options.
One asset class that the firm has been bullish on since 2002 is gold. As president and portfolio manager, David MacNicol explained, he still sees potential in the space. “Our premise in 2002 was there was too much government debt. Now, the debt levels have gone up between 10-20 times. We believe in the true value of hard assets - gold is probably the hardest of all assets – and we like a balance between the commodity and the mining companies.
“We are always reluctant to put price targets on these things. Gold is not something you can analyze and look at future earnings, but we do have insights to the flows of the commodity and the use of it, and we see a target of about $2,000/oz by the end of the year.”
Despite gold rising to levels not seen in almost a decade, MacNicol believes it is not too late to gain exposure. “Gold is definitely under-owned by Americans and U.S. intuitions. We have seen reports that gold is only 1-3% of portfolios; the commodity and miners. So, we see a lot more uptake there as institutions start to look for safe harbours.”
An area that gets many questions, especially in Canada is the energy sector. Some companies have been priced attractively, yet the team at MacNicol have not been so quick to jump in. “There is a lot of pain being felt in the sector,” said Joe Pochodyniak, senior portfolio manager. “CAPEX (maintenance and development) and dividends are being slashed and workers are being let go. Right now, with oil prices falling dramatically many projects are on hold so operators are not spending money to secure new assets or upgrade existing ones. As a conservative manager, we prefer to wait past the all-clear period.”
For Pochodyniak, one area he is high on is private equity, despite the overall economic slowdown. “There is a lot of cash that is looking for a home, so I think it will keep some upward pricing pressure on private equity, maybe not to the extent pre-COVID-19, but when we get to the other side, we’ll see the benefits of private equity and new opportunities.”
When it comes to private equity, one thing that both Pochodyniak and MacNicol said advisors need to be aware of is the difference between late-stage private equity and venture capital, which sometimes get lumped together.
“People have looked back at private equity returns, seen the great results and started chasing fast returns. Venture capital has seen even higher returns and when you are in a frothy market you get a lot of money lining up in venture capital funds. Now, since COVID-19 that has completely stopped,” said MacNicol.
“We do talk to venture capital firms, but we want to invest in businesses past the proof of concept phase. If you have continued economic slowness, that is going to be a challenge to companies in the start-up phase. As a result, I think you will see venture cap slow down a bit,” added Pochodyniak.
No matter the asset class, both Pochodyniak and MacNicol believe advisors need to rethink asset allocation. They insist that advisors can not wait to educate themselves on alternative opportunities because once the crisis is over it will be a very different environment.