The benefits of alternatives in these volatile times

Three industry insiders share their wisdom during WP's Advisor Connect Roundtable

The benefits of alternatives in these volatile times

With the war in Ukraine, surging inflation, increasing interest rates, and dropping equity and bond markets, more institutions, investors, and advisors are turning to alternative investments.

What can alternative investments provide portfolios with during these volatile times? Three industry insiders offered their views in the most recent WP Advisor Connect Roundtable on Alternatives.

Greg Romundt, president of Centurion Asset Management, which participates in equity and primarily lends to Canadian developers of apartments and student housing, said when it comes to the current economic situation, especially with inflation, “the banks will continue to hike until we break something, which I think we’re close to, and the markets are already starting to figure that out, and then I believe we go into the next phase of quantitative easing and rate cuts, and we will see the most money created in history and surpass what we did last time.”

Romundt felt stocks are overpriced and investors should be in real estate right now, but they should be picky about what since 35 to40% of staff would quit rather than return to the office. He thinks apartments are the place to be for the next five to ten years because “we’ve got so many great tailwinds”, such as short duration leases, the price to rent ratio, and immigration, but the future will be in newer, rather than older, properties.

Chris Nickerson, Managing Director of the Toronto-based Equiton, a rapidly growing private equity real estate investment organization that has a multi-residential and multi-family building portfolio, agreed, saying he thought inflation was probably a generational, rather than a ten-year, fix.

In the meantime, he felt that the rising interest rates mean more people will be renting than buying. While they may kick home ownership further down the road, he noted that a recent National Bank study said that that could now take 363 rather than 250 months.

“Home affordability, going into these rate increases, was already a challenge. With the additional rate increases, it’s going to be even more of a challenge. So, I think we could see an explosion of the rental market going forward,” he said, echoing Romundt that apartments are the best choice

Matt Zabloski, portfolio manager and founder of the Vancouver-based Delbrook Capital Advisors, which runs multiple strategies, including industrials, materials, and energy, in the cyclical equity universe, noted that a recent Scotiabank commentary said the Bank of Canada can’t do all the heavy lifting in addressing the current situation, but needs a fiscal response that ends handouts.

“I think a delinquency problem is just over the horizon in the real estate market, given the amount of leverage in the system” and the rising interest rates. He’s concerned about those who qualified for a five-year fixed mortgage rate of 1.7% and now are facing 5% rates. So, he’s looking at the hard assets, especially since “we see the precious metals world as almost a coiled spring right now”.

They agreed that alternatives can add a lot to today’s portfolios.

Nickerson said institutions have gotten into alternatives, particularly private real estate, because it protects their capital against negative market emotions, adds a reduced volatility component to the portfolio, builds a better portfolio from a correlation perspective since this asset class has a low correlation to other traditional assets classes and indexes, and, unlike other asset areas, such as emerging markets, has consistent returns.

“If I can reduce my volatility, if I can improve my correlation, and if I can remove emotional market forces from my portfolio, sign me up,” he said, noting that more institutional as well as individual investors are choosing alternatives, and he expects that to increase with privates, rather than publics, providing more of a bright spot to lift portfolios these days. “More and more individual investors are going to have a combination of fixed income equities and alternatives within their portfolios for those very reasons.”

Romundt said he prefers the private to the publicly-listed alternative space because “it really does come to this: the volatility of the underlying asset class versus the volatility of a stock market derivative wrapper”. He felt having the same assets on the stock market added an additional layer of volatility, and he said investors can be their own worst enemies by buying at the top and then panicking and selling low and they tend to put privately-listed things away and forget about them. So, I think this asset class helps you protect you from yourself.”

Zabloski said he likes to run short portfolios because he believes market inefficiencies exist and are “amplified on the short side”. He likes alternatives for their “strong security selection on the short side to be able to hedge inflation” and get an “asymmetric return profile where we can express our views, but then hedge ourselves.” He saw privates making sense for individual investors, but added, “we love the public market because we can find inefficiencies in what we do.”

The hour-long WP Advisor Connect Roundtable on Alternatives offered many more of their insights and observations, particularly about materials, margin calls, especially in the crypto markets, and mining commodities. You can watch it here.

Stay tuned for the next WP Advisor Connect Roundtable on exchange-traded funds on September 8.