Canadian advisors are increasingly bombarded with demand for “alternative investments" – a phenomenon backed up by new research – but what exactly are clients asking for?
Advisors are hungry for non-traditional products that offer greater portfolio diversification and access to particular asset classes with higher return potential, and interest is expected to grow as more 'alternative' products become available to retail investors.
“Has there been an increased interest in alternative investments since 2008? Yes, though most investors don’t know what they mean when they say they want ‘alternative’ assets,” Nicola Wealth Management advisor Jason Nicola told Wealth Professional. “All they know is that stocks have been a disappointment for more than a decade, and bonds are paying them almost nothing. They want an alternative to those two choices.”
A survey by Cogent Research found that 49% of advisors indicate they plan to increase allocations to emerging markets. They also anticipate significant increased use of non-US equities (35%) and alternatives (30%). Advisors said they are most likely to reduce their exposure to US fixed income and cash. While the survey covers US opinion, Canadian advisors says they see a similar trend.
The Alternative Investment Management Association of Canada (AIMA Canada), which was formed in 2003, has seen significant growth as Canadian institutional investors have sought out better performing assets than traditional equity and fixed-income instruments.
"From our numerous panels and meetings with members and the public there is definitely a trend to more hedged portfolios and alternative strategies in Canada and less money going to long-only bonds and stocks” said James Burron, AIMA Canada chief operating officer.
Over the next two years 41% of US advisors said they expect to decrease holdings of US fixed income, 23% said they would reduce US cash and equivalents; when netted out with advisors who expect to increase exposure to these assets, there was net reductions of 32% and 17% respectively, the Cogent survey found.
The biggest net gainers were emerging markets (a net 47% rise), non-US equities (+31), other alternatives (29%), real assets and commodities (+24%), real estate and REITs (+24%), non-US fixed income (18%), private equity (11%) and US public equities (5%).
Part of the drive to alternatives is that more products are becoming available to retail investors, though access is still limited to many Canadians.
“The biggest challenge is access,” said Nicola. “Many Canadians cannot afford to buy a commercial property, even if they partner up with friends, and so look to REITs to access the real estate market, and REITs can be much more volatile than the underlying real estate.”
Nicola noted that private equity managers can have investment minimums or $1 million or more, but we are seeing some players bring this threshold down. “Even some hedge fund managers have minimums of $25,000 and can only be purchased with non-registered funds,” he said. “The sooner that average Canadians can have access to “elite” asset classes such as hard asset real estate and private equity, the better."
The AIMA also expects alternatives to become more accessible to retail investors.
“Going forward, we see perhaps more retailization of hedge in Canada as certain regulatory initiatives may blur the lines between mutual funds and hedge funds and allow 'the other 99%' to take advantage of the benefits of these alternative strategies," said Burron.