Feeling the squeeze from low interest rates on your fixed-income portfolio? The good news is that you have alternatives.
Alternative investing is a large, deep pool with something for everyone, from the most conservative to those who just want a little spice. These investments can take the form of limited partnerships, mutual funds, closed-end funds or even mortgage pools.
The single biggest advantage of alternative investing is that it reduces the risk in your portfolio by providing an asset class that does not move up and down with the stock market. True diversification has been hard to come by since 2008, when stock and bond markets around the globe plunged, then recovered in unison.
For more conservative investors, Marret Asset Management Inc. offers three closed-end bond funds – two of them long-short strategies – managed by its founder, Barry Allan. Mr. Allan buys securities he thinks will go up and sells short those he thinks will fall. The Marret High Yield Strategies Fund yields 7.5 per cent, while the Marret Multi-Strategy Income Fund yields 5.9 per cent. The third and most conservative, the Marret Investment Grade Bond Fund, is a long-only fund yielding 5 per cent. The funds trade like stocks on the Toronto Stock Exchange and are eligible for registered savings plans.
The two long-short funds are “equity substitutes,” offering stock-type gains but without the volatility, Mr. Allan said.
He sees trouble ahead for the U.S. Treasury market if and when the European debt crisis spreads to American shores. To position the funds, he has bought long-duration bonds of triple-A rated U.S. multinationals such as Procter & Gamble Co., Johnson & Johnson Inc., McDonald’s Corp., Microsoft Corp. and Google Inc. In Canada, he likes high-yield bonds such as those issued by Baytex Energy Corp. and Vidéotron Ltée with yields in the 5- to 7-per-cent range. “It’s also prudent to have some exposure to precious metals.”
Against the corporate bonds, he has sold short U.S. Treasuries, whose prices have been pushed up by the Federal Reserve’s low-interest-rate policy. Worries about the size of the U.S. debt load could eventually put upward pressure on long-term interest rates, knocking bond prices down.
“The sovereign debt problems won’t go away until we’ve dealt with not only Europe but Japan and the United States,” Mr. Allan says. Extensive study of the issue has led him to a stark conclusion: “We haven’t been able to find a single country that has lowered its debt-to-GDP [gross domestic product] ratio without a crisis in its bond market.”
High-net-worth investors have even more options, among them private mortgage pools such as Toronto-based Romspen Mortgage Investment Fund. The fund, founded in 1966, manages a $600-million portfolio of commercial and industrial first mortgages. Mortgage pools are generally limited to people with a salary of $200,000 or more ($300,000 for a couple) or an investment portfolio of $1-million, although the rules vary from province to province. Investors of lesser means have to invest a minimum $150,000.
Like Marret, Romspen’s goal is to deliver high returns with low volatility. In 2008, when the Toronto stock market plunged 34 per cent, Romspen returned 10 per cent to investors – as it had for the previous decade. The fund has never had a negative year, said Mark Hilson, Romspen’s managing general partner. It, too, is eligible for registered savings plans.
Falling interest rates since 2008 have depressed the Romspen fund’s returns slightly, but it still managed 8.7 per cent in both 2009 and 2010 and 8.4 per cent in 2011. Investors are noticing.
“Because rates are so low across the yield curve, we sometimes have more money pouring in than we can accept,” Mr. Hilson says. When that happens, the managers have to close the fund for a few months “until we can conjure up more business.” It is open at the moment.
Key to Romspen’s success is its appraisal process. The managers set a value on a property and then lend up to 65 per cent.
“The key is to make sure the upfront value is right,” Mr. Hilson says. “You have to understand the property, the borrower, the market.” The process includes an exit strategy in case the borrower defaults. Because Romspen is an equity investor rather than one that relies on borrowed money, it can afford to take a property back if need be and operate it until the market recovers – something it has done in the past.
“You don’t want to dispose of a property in a down market and take a loss,” Mr. Hilson says. “Real estate as an asset class is very forgiving if you have the benefit of time, which we do.”
If you want spice, consider the Friedberg Asset Allocation Fund, a mutual fund in which investors stand to benefit from the strategies of hedge fund manager Al Friedberg. Despite the fund’s constraints – the managers can neither sell short nor borrow – it was up more than 21 per cent for the 12 months ended Jan. 31.
Among the multi-strategy fund’s holdings are its positions in gold and U.S. Treasury inflation-protected securities, or TIPS. The managers are free to invest in commodities, currencies, bonds and stocks anywhere in the world using derivatives such as futures and options. The fund, which can be considered an alternative to a bond fund, is eligible for registered savings plans.
“Indexed bonds have done very well,” said Michael Hart, vice-president of trading at Friedberg. Like Barry Allan of Marret Asset Management, the Friedberg managers are betting on inflation down the road. In the meantime, long-term bond prices are rising as interest rates continue to drop – in some cases into negative territory after subtracting inflation. If inflation erupts in the future, inflation-linked bonds and gold will be nice to have. When might that happen?
Wile E. Coyote has run over the cliff’s edge and is suspended in mid-air, Mr. Hart says. “Everybody is waiting for gravity to kick in, but it’s taking much longer than anybody expected.”
Special to The Globe and Mail
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