How alternative assets can aid clients' inflation fight

Uncorrelated market return can provide some comfort for client portfolios

How alternative assets can aid clients' inflation fight

Financial advisors wanting to protect their clients against inflation should look to alternative asset classes to help to buffer their portfolios.

“The key theme that jumped out from the most recent inflation numbers is that, for average Canadians, the things that they’re buying every day and don’t have any discretion around are continuing to get more expensive,” Jason Hunt, a financial advisor who is an associate portfolio manager with First Avenue Investment Counsel in Ottawa told Wealth Professional.

He was commenting on the impact of the latest consumer price index (CPI) numbers that Statistics Canada released yesterday. It noted that the CPI had a 4.4% year-over-year increase in April. It was the first acceleration in headline consumer inflation since June 2022, primarily due to rises in gasoline, shelter, and grocery costs, though grocery prices are increasing at a slower pace.

“Inflation was continuing to increase, but it was doing so at a decreasing rate. That trend changed for April,” he said, noting the housing market has cooled, but the impact of mortgage rates has not.

“Mortgage interest is part of what’s in that basket and is measured as part of CPI. Obviously that is much higher, almost 30% higher, year-over-year to April of this year. So, it’s paradoxical that, for the average Canadian, we’re increasing interest rates to fight inflation. But, at the same time, it’s also contributing to that headline inflation number.”

Hunt said he’s seen inflation’s impact on many Ottawa government workers who have not enjoyed the salary increases that other sectors have, so are finding their budgets under pressure – and may feel more strain if they have to buy big-ticket items they hadn’t expected.

He noted one client had to find other accommodation because her landowner had to sell a property that had to be refinanced at a higher rate. He expects more may feel the pinch as discretionary income continues to decline and inflation and interest rates continue to add mortgage and budget pressure. Those leasing vehicles may have to buy or return them and lease at a higher rate.

First Avenue Investment Counsel specializes in alternative asset classes, especially residential real estate, for which clients have enjoyed successful exits. It includes alternative asset classes, along with credit bonds and equities, in its portfolios, which it has been repositioning to protect clients.

“We have a track record of an uncorrelated return to market, so that provides some level of comfort in terms of our client portfolios,” Hunt said, “because they’re still seeing growth at a time when equity markets are suffering, although there’s been somewhat of a rebound heading in 2023.”

First Avenue is also overweight on utilities and using more precious metals, which historically do well in an inflationary environment or where the gross domestic product is decelerating.

The company also ensures that its clients regularly hear from it, providing commentary as well as traditional portfolio reviews. Some of its professionals also speak on BNN so, Hunt said, “there’s a constant dialogue between the clients and ourselves.”

Hunt urged advisors to check in with clients to ensure they’re still “able to sleep soundly at night with whatever decisions they make for their finances, whether it be for their portfolios or their financial solution for their home.” Advisors can also help clients think about what’s most important to them and what makes them the most comfortable.

If advisors don’t already have some of their client’s portfolio in alternative asset classes, he suggested they should they’re continuing to play a bigger part. He noted that the Canada Pension Plan has the majority of its assets in alternative assets.

“The world’s becoming more complex and seeking return that’s uncorrelated to traditional asset classes is becoming more and more important,” said Hunt. “I think alternative asset classes will continue to be more important because they’re not accessible for the average client. I think the industry will, over time, find way to make it more accessible to the average investor, and not just ultra-high net worth investors. We’ll come to see that it’s an important art of the portfolio, away from that traditional 60/40 bond/equity portfolio.”