Early adopter on the power of alternatives

Mandeville investment advisor explains his moment of clarity 20 years ago and the influence of legendary portfolio manager David Swensen

Early adopter on the power of alternatives

By definition, alternative investments are unconventional and for those bred a diet of stocks and bonds and balanced portfolios, they may appear unpredictable or risky. But the democratization of strategies previously available only to pension funds and the ultra-high-net-worth is changing perceptions.

Michael Hayhoe, Senior Investment Advisor at Mandeville Private Client Inc., is no Johnny come lately to alternatives and views them not only as a source of returns but as a kind of investment sandpaper, smoothing out market volatility.

His lightbulb moment came two decades ago when clients “freaked out” during a market correction. They were looking for growth and he had a significant equity sleeve, but as the market jumped around and volatility persisted, Hayhoe pivoted to fixed income. Soon, however, yields narrowed, leading him down the path of alternative fixed-income strategies.

That was the push factor but there was also the pull of David Swensen, the trailblazing portfolio manager credited with revolutionizing institutional investing, who had a major influence on Hayhoe’s thinking. He devoured Swensen’s ground-breaking book, Pioneering Portfolio Management, and never looked back.

He said: “That really opened my eyes to say, ‘there's more than just mutual funds or picking stocks; there are other things out there’.”

That Damascene conversion was 20 years ago and since then the Canadian industry has grown significantly. Hayhoe went to his first strategy institute conference in 2001 and, as he recalled, back then it was all about hedge funds. There wasn’t much private real estate, no REITS and private lending was very much on the equity side of the equation. Now the scope is much broader.

For Hayhoe, diversification is a major aspect of wealth management just as Swenson argued would increasingly be the case, but the biggest change has been navigating and assessing the number of new offerings. Yet, alternatives aren’t just about smoothing out bumpy markets; Hayhoe is clear they are also a valuable source of excess returns.

“There’s alpha to be found in alternatives,” he said. “That's why at Mandeville they are very amenable to alternatives. We have a focus on private debt focused on private real estate, but we also use public debt in appropriate volumes, and dividend paying equities. We manage very much with a pension style, with a real focus on being conservative and delivering income.”

Hayhoe’s practice is primarily baby boomer-centred because, as he observed, that's generally where the assets are. “Our practice really focuses on conservative, income-focused clients who have built wealth and are now looking to access that wealth. Ultimately, we're [also] having conversations about passing that wealth on.”

The second focus of his practice is Generation X, people in their 40s and 50s who are still in the accumulation phase. They have different priorities and the style of investing has to adapt accordingly, with portfolios that are more growth oriented and with more tax planning as most of them are higher income earners.

Wealth transfer is a hot topic in the industry, with trillions of dollars poised to change hands in the coming years, and Hayhoe says they have been very proactive on that front, encouraging older clients to introduce them to their children. Looking to the decades ahead he is aware that his clients will want to pass their wealth on and that much of that wealth will go to their children, so there are some sensitive subjects that must be broached.

Planning and training are key to ensuring this is a success but that applies as much to the industry as to those it serves. For Hayhoe, it’s vital to train the next generation of professionals coming after him.

He said: “I have two younger guys who work for me now. By investing in them I can free up more of my time and, I know this sounds cheesy, give back a bit to the industry. I really appreciated it when I was a young guy.”