Advisors must consider what they're looking for when adding asset class to their roster
Adding alternatives to your portfolio must always be accompanied by an understanding of what you’re giving up. The ability to capture the benefits of the asset class – including the illiquidity premium – has been thrown into sharper light by fixed income’s struggles.
However, Allan Seychuk, senior investment director at Mackenzie Investments, believes this is always going to be an allocation decision because you'll be selling something in order to add something else.
He said: “If you're trying to do something like enhance return, then perhaps you're okay with a vehicle, whether it be an ETF or a fund, that still contains a lot of equity beta but may deliver that source of return with a little bit of a different flavour, using leverage or some shorting, which would be new to your portfolio.
“But if you are trying to add alternatives, in order to manage risk, or diversification, then maybe you don't want something that's about the same degree of equity beta. So, it's really important to know what you're trying to do and then select the correct vehicle and the correct alternative to do that.
“A lot of the products we see in the marketplace today have been quite successful in terms of returns and giving you equity beta, as well as some additional return enhancement through alpha. If you're an investor that already feels they have a lot of equity beta, you need to be careful in terms of what you're selecting.”
Seychuk believes alternatives can be useful in three distinct ways - return enhancement, yield enhancement in a low-yield environment, and for risk management and diversification. The latter could be tail risk management or crisis alpha, tapping into different sources of return that are not present in a traditional 60-40 portfolio.
He added: “But a lot of these areas, if you gain on one, you're trading off on another. If you want more return, you're not likely to get a vehicle that also offers you risk management or tail risk management at the same time. So those are the kind of considerations that we would think deeply about when working with advisors, and thinking across the landscape of alternatives.”
