Labelling liquid alts high risk has been dismissed as “nonsense” by a chief investment strategist.
Myles Zyblock, of Dynamic Funds, told WP that companies blanketing these new products in that way are wide off the mark, and that education and experience will ultimately bring them into the mainstream.
Dynamic Funds, a division of 1832 Asset Management L.P., recently announced the launch of its third liquid alternative offering, the Dynamic Real Estate & Infrastructure Income II Fund, which – true to its name - features real estate and infrastructure securities, as well as a monthly income stream.
Zyblock said that while liquid alts are nascent products for the retail community, they have been used to great effect for decades by various pension, sovereign and endowment funds. He believes that once the comfort level increases, investors will realise that, while “not magic”, liquid alts are an effective diversification tool.
He said: “We have a gold rush here where there is well over 30 liquid alts already tabled by different fund manager companies in Canada. Some of those are going to disappear fairly rapidly because they are being stewarded by inexperienced fund managers. Once the gold rush dies down, we are going to have some very good products for retail Canadians to put into their portfolios to help them manage the broader financial market risks.”
The education process, said Zyblock, is well under way and advisors are rightly sceptical and asking some pointed questions. Are they long, short equity? Is it a bolt-on arbitrage? Is it all of the above?
The strategist said liquid alts are simply a different asset class versus bonds or equities.
“[Advisors] are having trouble understanding what the term liquid alt means because it is wide ranging. But as they get more comfortable, it’s no different to us talking about micro-cap funds, small, large cap, growth, value, income … there’s many different shades of equity investing just as there are many different shades of liquid alternatives.”
Picking a good liquid alt product as opposed to a poor one is, just like with any investment, critical. Zyblock stressed that for this tool to be an effective diversifier, it must have two characteristics: a low correlation with traditional asset classes and a positive expected return.
He added that two of the more tangible tests for a liquid alt are its track record and whether the fund manager is up to the job.
“You want to make sure that whatever has been promised by this liquid alt has been delivered through time,” he said. “You also want to understand how the manager performed through different economic cycles. You want to see if it’s true to its marketed mandate.
“You can promise all these things but if it hasn’t been stress tested; you ultimately don’t truly know what you are buying into. You are buying into more of the story but if you have the full record, the portfolio manager’s record and the fund's itself, I think you have more confidence that the ship is being steered in a way you think it should be steered.”
Keeping the benefits and requirements simple should be an easy way for advisors to trim down the number of products significantly and alleviate the danger of opting for a dud product.
But Zyblock admitted that gaining support among the Canadian advisory community is a slow process simply because the awareness is not there, although he has been encouraged by the early uptake. Economic conditions mean many are taking a fresh look at their asset allocation.
“The education that we are providing as a firm seems to be bearing fruit in the sense that people are sceptical, which they should be, and asking great questions about the characteristics of liquid alts and how they should be used.
“But we are slowly moving and making progress, and hopefully Main Street Canada will at some point be as comfortable using liquid alts as buying mutual funds or ETFs.
“Usually yield curves invert ahead of economic problems and people are starting to address their current portfolio allocation. The fact that maybe we need to diversify away from some of our equity risk seems to be more of a common topic today than, say, it was four, five or six months ago.
“The fourth quarter of 2018, where financial markets got incredibly volatile, has reawakened people’s interest in alternative types of investing that maybe branches away from pure equity risk.”
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