With markets testing all-time highs - at least in the United States - investors can be forgiven for thinking a pullback is just around the corner. The question is: What alternatives are there to the usual mix of equities and fixed income?
Investment firms tout hard assets such as real estate and farmland as counterweights to the market. But Canadian real estate is red hot, and most of those products are created for high-net-worth, accredited investors. For those with fewer resources, what alternatives are available?
The strategy behind alternatives is simple: "You want to diversify away from the public markets," said David Kaufman, president of Westcourt Capital Corp., a Toronto firm specializing in alternative investments.
Achieving that goal, unless you have a sizable portfolio, is the real challenge. The plunge in value of real estate investment trusts, or REITs, this past spring when interest rates spiked illustrated that publicly traded REITs, as prized as they are as yield generators, cannot claim to be a true alternative. In fact, REITs can in certain conditions suffer a double whammy and feel the effects of both the equity and fixed-income markets.
"Most people buy REITs for income, so when interest rates go up, REITs go down because they trade like bonds. And when equities go down, REITs also go down because they trade like equities," Mr. Kaufman said.
True alternatives to public REITs do exist - namely private REITs and mortgage funds, both real estate-linked investments whose value is not tied to the daily ups and downs of the markets. The problem with private REITs is that they are again targeted to high-net-worth investors.
Investors will find a few public mortgage funds, but fees can be high, and their valuation fluctuates with the markets, again stretching the definition of alternative. Some are structured as mortgage investment corporations such as Timbercreek Mortgage Investment Corp. Tried and true Canadian mortgage funds include the Investors Group Mortgage Fund and the London Life Mortgage Fund and the low-fee HSBC Mortgage Fund.
Exchange-traded-fund pioneer Som Seif, the former chief executive officer of Claymore Investments, has launched a new venture that promises to offer average investors some of the sophisticated investment vehicles but at ETF prices.
His new firm, Purpose Investments Inc. of Toronto, has introduced a series of ETFs managed by hedge fund firm Breton Hill Capital that offer wrinkles such as hedging strategies and hard asset ownership, which can be considered as quasi-alternatives to more standard market investments. "I believe that everyone should have real assets in their portfolio. It is one of my fundamental beliefs," Mr. Seif said.
Claymore, which was acquired by BlackRock Inc., created individual funds focused on sectors such as agriculture, gold and commodities. With his new venture, Mr. Seif decided investors needed more simplified choices contained in products such as the Diversified Real Asset Fund and the Tactical Hedged Equity Fund.
"People ultimately need guidance on how to invest, otherwise what happens is when people think about real assets or hard assets they buy gold," Mr. Seif said. "That is a tough asset to own on its own."
The Real Asset Fund does not promise true independence from the equity markets like alternative investments do, he said. Instead, the fund blends several investment strategies. It is designed to hold hard assets such as precious metals, industrial, energy and agricultural commodities, bonds, cash and REITs, at a low management expense ratio (MER) of .60 per cent.
The fund seeks to give shareholders exposure to a diversified portfolio of asset classes linked to physical assets that either maintain their value or gain in value during inflationary times. They may include precious metals and related equities; industrial, energy and agricultural commodities and related equities; REITs; emerging market currencies; real return bonds; and treasury inflation-protected securities (TIPS) and cash.
Currently it is heavy on cash (32 per cent), real estate (22 per cent), materials (16 per cent) and energy (14 per cent). "You need the counter (to the market), but it also provides different sources of return," Mr. Seif said. REITs are a major component of the fund, which holds the likes of RioCan, H&R, Calloway, Boardwalk and Dundee.
Since it was launched two months ago, Mr. Seif's new venture has attracted more than $260-million in investor funds.
The divide between accredited investors and the rest of the investing world can be narrowed over time, he said.
"What I think we need to do is bring more of these alternative-asset-class concepts to the broader market through the regulatory environment," he said. "We need alternative managers and alternative strategists to think about how do we get ourselves better registered so that we allow the broader investor to access us."
© 2007 The Globe and Mail. All rights reserved.
Discover a wealth of investment information and and exclusive features.