REPOST: Looking for yield in a low yield world: Can alternative investments help?

The article below looks into the potential of alternative investments to yield higher returns and the possible remedies for the fixed income problem.

Image Source: www.financialpost.com

Gather a group of investment professionals in a room to hear from panelists on the subject of “In Pursuit of Yield: Alternatives to fixed income,” and chances are that the discussion will be both lively and offer different views.

That was the scene Thursday in Toronto at the fourth Canadian Alternative Investment Forum, an all-day event called at a time of very low interest rates, high stock market prices and a year just passed that saw a 10% plus decline in 30-year Canada bonds.

“It’s a double whammy,” said David Kaufman, the panel’s moderator. ‘There’s no return and investors will lose when rates rise,” added the chief executive of Westcourt Capital Corp., when discussing what lies ahead for fixed income buyers. And all the key reasons to own bonds – capital preservation, moderate total returns and an asset class that isn’t that correlated with other asset classes – get a cross, Kaufman said.

Accordingly, different ways to approach the fixed income problem, an asset class that has traditionally accounted for about 40% of a pension funds’ assets, were required, argued Kaufman.

For Paul Sandhu, a manager of investment grade bonds at Marret Asset Management, the solution is a long/short strategy that aims to be interest rate neutral all backed up by a moderate (1.7 times) amount of leverage. “We are betting on the movement of the corporate spreads and being an active trader,” he said, adding that the interest rate risk is hedged out by selling government bonds. The firm buys and sells corporate bonds in three markets: Canada, the U.S. and Europe.

Over the past two years, Sandhu said the returns, on average, have been double digit, and higher than what a passive strategy would have generated. Aside from the strategy, Sandhu said that depth of the team implementing the strategy is a key factor investors need to focus on when deciding whether to allocate resources to this approach.

For Jeff Peskind, founder of New York-based Phoenix Investment Adviser, the solution is, as always, obtained by buying non-investment grade bonds, the firm’s focus for the past decade. “We don’t want to take duration or interest rate risk,” declared Peskind who prefers to take credit risk, in part because of his view that bankruptcies, and hence defaults, will continue their recent trends and “remain low for a few years.” In his view, “high yield is the place to be in an unfair Treasury world.”

But what about the US$1-trillion of junk, garbage perhaps, that has been raised over the past two years? Won’t that come crashing down because of a weakening economy? Not so, he said, because over the past three years, debt to cash flow ratios for junk bond issuers have averaged 4.5 times – or less than what prevailed in the three years up to 2008. “There’s a lot more debt but it’s not as bad as pre-crisis,” he said, noting that his firms “add value” by spending considerable time on legal and operational due diligence before investing.

Andrew Torres, chief investment officer at Lawrence Park Capital Partners, also uses “active trading strategies” to generate returns. As with Marret, the strategy entails owning investment grade bonds and selling Canada bonds (and at times equity put options) against that holding.

Over the past two years, the firm’s credit strategies fund posted a 15.54% return and 4.55% over the twelve months to Feb. 28.

Elizabeth Lesar is a highly respected figure in the finance industry. She is known for her technical expertise in alternative investments, equities and fixed Income products, and revenue generation which she complements with a solid background in marketing and client service solutions. Read this blog to find out more about her accomplishments in the different categories of finance.

REPOST: ‘Alternative’ investments go mainstream

The Investment Company Institute has created a new classification system for mutual funds that highlights the emergence of what experts called mainstream alternative strategy funds. The article below advises on how investors can benefit more from the new changes in mutual funds categories.

Image Source: www.marketwatch.com

Normally, that’s a big reason for concern, a sign that something is afoot and that management has been following a new path.

This time, however, it’s because the Investment Company Institute – the trade association for the fund industry – “modernized” its investment-objective classifications for funds. Truthfully, this is all about helping the public understand trends in mutual fund investing, and it’s something that the ICI does every 10 to 15 years.

The changes won’t actually affect your funds directly either. Ratings agencies like Morningstar and Lipper have their own classifications for funds, and even if ICI has put a fund you own into a new category, that simply reflects what the fund has been doing – and has been allowed to do – according to its prospectus. It does not give management new leeway.

The changes do, however, reflect new attitudes for the fund business, and those kinds of things will trickle down to investment advisers and, eventually to consumers like you.

As a general rule, when old methods are “refined,” they wind up being pitched to consumers as being “improved.”

Under the ICI’s old classification system, there were 33 categories for open-end mutual funds; the new system has 42 categories and while many of the new categories were added to bond funds and related to the funds’ time horizons, the biggest change was reflective of the emergence of “alternative strategy funds.”

The ICI now has an alternatives objective within its domestic equity, world equity, hybrid and bond categories.

That means, in short, that alternatives are officially mainstream.

As such, investors are going to find themselves being pitched more and more of these ideas, which is a shame because the label is so misleading.

Technically, most long-time investors would tell you that an “alternative investment” is anything that’s not in stocks, bonds or cash, the three biggest, most general categories. In fact, if you ask individual investors about their alternative investments, most will mention real estate, gold or precious metals and possibly commodities.

But that’s not how the powers of the mutual fund world see things.

The ICI defines a domestic equity alternative strategy fund as seeking “to provide capital appreciation while minimizing risk while employing long/short, market-neutral, leveraged or inverse strategies.” The other new alternative categories, similarly, include mention of those kinds of sophisticated investment tactics.

To borrow from “Cool Hand Luke,”one of my favorite old movies, “What we’ve got here is failure to communicate.”

Gregg S. Fisher, chief investment officer at Gerstein Fisher, runs real estate funds, which for most investors would have fallen into the “alternative” camp long ago.

He suggests a common-sense definition for alternatives that is unique based on the investor.

“People should think of alternative asset classes as things that are different from what they already own,” Fisher said in an interview for my radio show. “If I’m somebody who owns a lot of stocks and bonds, then an alternative might be real estate. On the other hand, if I am someone who already owns a lot of real estate, then an alternative for me would not be real estate, it might be stocks or bonds.

“The best way to think of alternatives is not as some exotic derivative instrument, or whatever people are thinking,” he added, “but in fact it’s just something that’s different from all of the other things you own.”

When industry types create new categories and come up with new ways to weigh and measure funds, invariably there’s a proliferation of effort to tell investors that they need to change their portfolio to adjust.

That’s the wrong thing to take from the ICI changes. The trade association is not so much encouraging the development of more and varied alternatives as it is trying to make sure that the new/different strategies don’t pollute the rest of the data stream and muck up statistics for the rest of the players.

It’s reflecting a trend that has been emerging in the fund world for years now, not encouraging investors to adopt the movement.

That’s important because as “alternative funds” become their own asset class, they’re being sold as a key portfolio ingredient to folks who don’t want or need the complexity and cost, who can’t understand the strategies well, and who might be nervous if they really knew what they were buying.

Investors who go for a portfolio evaluation and review, or who hire a financial planner are more likely than ever to hear that they “don’t have an allocation to alternatives,” when the truth is that their portfolios have gotten along fine without them for years, or when the appropriate alternatives might be real estate or gold.

Just because the fund industry has recognized alternative funds as mainstream doesn’t mean that investors should. When fund companies create these funds, “alternative” always sounds like “another way to make money,” but investors should not lose sight of the fact that it’s another way to lose money too.

An authority in alternative and traditional investments, Elizabeth Lesar helps investors maximize returns through partnerships and ground-breaking investment paradigms based on tried and tested fundamental principles. Subscribe to this Twitter account for select news on investment management and marketing.