Certain classes of alt investments have become solid performers – here’s how to make better use of them
While the downturn resulting from the coronavirus has been the first major test of the promised defensive benefits of alt investing, it has also been a lesson for investors about some of the complexities inherent with this asset class.
Executives at Canadian Mortgages Inc. (CMI) say that in the wake of the market downturn, their investment product, residential mortgage investment corporations (MICs) have delivered stability for investors. They say that using MICs to invest in Canadian residential mortgages has protected investors against the downside in the short-term and offers solid growth prospects in the medium-term despite an uncertain economic picture.
“While markets have gyrated up and down, our funds have not seen the same type of volatility in their valuations and that has enabled some level of comfort for our investors,” said Bryan Jaskolka COO of CMI. “We, unlike many funds, have not stopped redemptions, and we have not drastically altered our investment returns below the prescribed thresholds that investors were initially advised of. While we've seen a marginal reduction in the return we're offering, our investors have continued to receive regular income distributions, the value of their underlying investments have remained intact, and ultimately, our investment funds have performed very well.”
Jaskolka says much of that solid performance is because their MICs invest in residential rather than commercial mortgages, which are more prone to market volatility and have been more negatively impacted by the pandemic. As well, because MICs invest in debt and not the underlying equity, even if property values dip in the wake of the pandemic, these mortgages will remain as is. He also noted that these mortgages in CMI’s MIC portfolios are still performing well since property owners prioritize servicing this debt during the pandemic given it’s often their principle residence.
However, Jaskolka understands that high unemployment and the resulting lost income poses a risk to all investments, even residential mortgages. At the same time, though, he says that housing is such a fundamental need that residential mortgages don’t face the same risk of default like commercial mortgages during a downturn. As well, since MIC portfolios are offered at different levels of risk, investors can choose the fund that best aligns with their risk tolerance.
CMI also wants to use their MIC funds as a means to educate and inform investors about the benefits of alt investing strategies so they can make better use of this asset class in their portfolios. Julian Clas, VP Capital Markets and Funds at CMI, says that incorporating alt products like MICs will result in more consistent returns for investors, whatever the market conditions may be. MICs enable private investors to gain access to alts in a similar way to how public pension funds have used this asset class for many years.
“If you are using a 60/40 stock/bond portfolio model, in a long-only position and the public market goes down, you’re going down no matter what,” Clas says. “Public pension funds, though as an example, have been moving their assets into alts for a long time, giving up some liquidity to ensure their portfolio remains positive no matter what.”
Clas and Jaskolka both say more investors need to make use of this investment strategy. It’s a technical strategy, though, built around novel products. For investors to benefit from alts, they need to be educated about them. That’s where advisors come in.
While many advisors are already deep into alts, others have stuck with more traditional portfolio models for their clients. In an effort to spread the word on alts in general and MICs in particular, Clas and Jaskolka have authored a whitepaper on how alt investing has moved into the mainstream and how advisors can incorporate this strategy for their clients. They say this whitepaper should help to bridge some of the educational gaps that exist around alts.
“Most advisors are aware that alternative investments are out there, but I think many have not yet taken the opportunity to familiarize themselves with that space as much as they could,” Jaskolka says. “Most people, instinctively, are afraid of what is new. The more they can read about them, the more they can talk to issuers and get a familiarity and understanding of the pros and cons of those types of investments, which will ultimately with time, give them a better comfort level to gain some exposure.”