Hahn Investment Stewards’s Tyler Mordy: ‘Alternatives come in different packages.’Jeff Bassett/The Globe and Mail
In today's world of near zero-return fixed income investments and a stock market that rises and falls more on vague signals from government officials and central bankers than traditional market levers, interest in alternative investments is rising among Canadians.
Long a product only for the rich, the minimums for alternative investments are dropping fast, putting them in reach of less well-heeled investors as the industry sees a huge market eager for yield, growth or both.
While some alternative investments can show superior returns for portfolios relying heavily on stocks or bonds, the reality is that the space is still less-well developed than in jurisdictions like the United States, is still tilted to those with a fair amount to invest, and can carry higher-than-average fees.
"Even if you did have a lot of money, the management fees are high," said David Kaufman, president of Westcourt Capital Corp. in Toronto, which uses alternative investment strategies for wealthy investors.
He favours the alternative approach in part because the traditional 60-40 split of equities and bonds (in whatever proportion), simply cannot account for today's risks, which include currency fluctuations and the simple risk of holding positions passively while the world around changes.
"The way that you can overcome currency, geography and strategy, is to get something that is an unconstrained, core portfolio of ETFs [exchange traded funds] that is tactically managed." This approach relies upon the principle that stock and bond picking have little chance of beating the market, compared with asset allocation.
Mr. Kaufman favours professional tactical ETF managers as a low-cost, worry-free way to participate in this area. His current favourite is Hahn Investment Stewards, which has pioneered the practice of allocating and reallocating holdings in low-cost ETFs to diversify holdings and minimize any downside risk. The fact that Hahn is based in Toronto is just a happy coincidence, he said.
"The best chance of experiencing the free lunch of diversification among and within asset classes but also through geography and currency would be to use something like that and then just go and play golf," Mr. Kaufman said. "They worry about the reallocation and tactical approach."
Tyler Mordy, Hahn's director of research and co-chief investment officer, is philosophical about the recent groundswell of interest in alternative investments. "Alternatives come in different packages, but they are merely existing asset packages repackaged and often times they come with sore points such as high fees, but there is nothing new here."
Hahn's approach is to actively use the "cheapest" possible investments to build portfolios. That has turned out to be ETFs, which are the ultimate passive investment. That has led many in the investment business to mistakenly describe Hahn as a passive investment manager.
Hahn, and a few competitors in the emerging field of managed ETF portfolios, run a number of funds geared toward investors with different investment horizons and risk appetites. In Hahn's case, its funds typically hold between 15 and 25 different ETFs with a "long-only, conservative" investment approach. Fees are in the 1.5-per-cent range.
Morningstar reported in January that the managed ETF portfolio space is made up of about 95 firms with $40-billion to $100-billion in discretionary and non-discretionary assets and model portfolios as of September, 2011, and were enjoying incredible growth, about 43 per cent over the prior 12 months.
Hahn's Mr. Mordy described his firm's funds as within the range of "the average mom and pop," but that average investor still needs to invest a sizable amount, given the firm's $100,000 minimum. That's not an accidental sum. "Our founder, Wilfred Hahn, said that he could build a better portfolio today for $100,000 than he could back in the 1990s for a $10-million pension fund," Mr. Mordy said.
The firm's track record with its ETF-only approach to alternative investing has paid off. In 2008, when the average balanced portfolio dropped nearly 24 per cent, Hahn's balanced vehicle fell 5 per cent. Since it started offering its ETF-based funds in 2003, it has averaged an average return of 7 per cent.
For those investors with more modest amounts to invest, Mr. Mordy noted that Hahn manages a line of pooled funds under its parent company Jovian Capital, dubbed the JovFunds.
Another alternative is gold. Investors who purchased gold, either the physical stuff or in its abstract form in a gold ETF, have done well and handily outperformed the market. The classic alternative investment, "gold is basically a fear asset; there are a lot of reasons to be fearful so gold has been good for the last decade," said Ernest Lang, a principal with Meritus Financial Inc., who specializes in alternative investments for wealthy investors.
Mr. Lang's strategy for his wealthy clients includes creating specialized insurance products to sidestep large tax liabilities that come with passing estates between generations, providing private mortgages and making equity investments in private businesses.
The adviser, who has done very well over the past five years providing private mortgages himself, said that investors should be careful acting as their own bank for buyers who can't secure a traditional bank mortgage. He has done well because he has a real estate background and is comfortable with the due diligence and loan evaluation process.
He urged investors (and their advisers) to be on the lookout for alternative investment opportunities that arise from time to time. A classic case for him was Manulife's pioneering Income Plus guaranteed withdrawal benefit annuity. A few years after its introduction, the benefit structure and pricing was unchanged while interest rates were falling. "There was a real sweet spot" for about three years, he said.
As for funds that allow investors to buy Canadian farmland or real estate, "the challenge with some of them is their fees," he said. "Once you get a bank-trained investment banker type involved in some of this, they know how to fee it up pretty good."