Unpacking opportunities in the alternative investment universe

Veteran PM explains increasing interest in liquid alts, and why differentiating between public and private real estate matters

Unpacking opportunities in the alternative investment universe

After experiencing steeply rising rates and record inflation pummel the traditional 60-40 portfolio of late, investors across the world were forced to reckon with the notion of investing beyond stocks and bonds. But at Francis Sabourin’s practice, that decision had already been made nearly a decade beforehand.

“For a long time, investors in the public markets were stuck with the reality of TINA – There Is No Alternative to equities,” says Sabourin, portfolio manager and investment advisor at Francis Sabourin Wealth Management with Richardson Wealth. “That’s why we started using alternatives to diversify our portfolios.”

For Sabourin, true portfolio diversification and stability means going beyond traditional equity and fixed income. Alternative investments have been prominent in the portfolios at his practice since 2014; he started using liquid alternatives as soon as they were introduced in Canada in 2019.

“In 2022, I am proud to say that our portfolio outperformed more than expected,” he says. “I believe there is a need for investors to include those types of products/investments as a supplemental strategy to the more traditional position whether in stocks, bonds, and cash.”

Sabourin divides the world of alternatives into three buckets: liquid alts, which offer daily liquidity; semi-liquid alternatives, where redemptions can be made every few months; and illiquid alternatives, which have lock-in periods on the investment of years or decades. Private-market investments, he says, tend to fall under the illiquid investment umbrella.

Looking across the alternative spectrum, Sabourin sees more opportunities on the liquid side of the portfolio management equation. Over the past few years, he’s seen an increase in the offering of liquid alts in Canada, as well as better pricing options.

Aside from some adjustments in NAV, he says asset valuations are changing for liquid alternatives due to movements in the market itself. In public real estate, increasing cap rates have caused valuations of the underlying real assets to come down, which Sabourin expects will filter through to the NAV of the funds.

“Illiquid alternatives are still there if you want it. But for retail investors, I will tend to avoid that third category unless the client truly understands that it’s a long-term commitment,” Sabourin says. “We’ve made investments in private equity funds where we were supposed to cash out after seven to eight years, and we ended up being there for 15 years.

“For those that are tactically oriented, I will say that liquid alts are interesting opportunities to keep in mind for the next 12 to 14 months, as long as we don’t go into a deep recession and liquidity crisis,” he says.

Like many other investors and advisors, Sabourin is looking at real estate as a source of alternative returns. But he’s also careful to distinguish between public and private real estate investments, especially considering the impact of the extreme rate increases by the Bank of Canada and the Federal Reserve.

“Public real estate was beaten down so much last year, so we might see some very interesting opportunities. But by investing in them, you also have to live with the fluctuations of the market, and that’s what people try to avoid,” Sabourin says. “Like it or hate it, the public markets are like a voting machine; people can make an investment, see how it performs right away, and react to that.

“On the other side of the coin, some private or real estate investments can be re-marked every quarter, but their valuations tend to be more conservative,” he says. “You have to think about what type of portfolio you want to build for your clients.”