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Innovative multi-asset strategies can boost your balanced portfolio

By tapping into an array of non-traditional assets, Mackenzie Investments’ Diversified Alternatives Fund seeks to deliver higher-risk-adjusted returns by complementing investors’ core portfolios

Date: January 26, 2017

Many Canadians might be surprised to learn that they’ve invested in non-traditional, or alternative, assets for years. Their vehicle? The Canada Pension Plan, says Allan Seychuk, vice-president and senior investment director at Mackenzie Investments.

Non-traditional assets can be said to encompass everything that isn’t a traditional developed-country stock or investment-grade bond, Mr. Seychuk notes. Institutional investors and high-net-worth individuals use alternatives, which range from private equity and real estate to leveraged loans and preferred shares, to avoid relying too heavily on traditional stock-market and interest-rate risks.

In their personal portfolios, non-accredited Canadian retail investors haven’t followed suit. “There are many types of bonds, stocks and other asset classes that are under-represented or completely absent from most Canadians’ core traditional portfolios,” Mr. Seychuk says. “But they provide sources of return that are less correlated to the return pattern of traditional stocks and bonds.”

Alternatives play a much bigger role for retail investors in the U.S., where asset managers long ago began educating the average retail investor on the need to broaden out from traditional stocks and bonds, according to Mr. Seychuk. But Toronto-based Mackenzie is changing the game in Canada with its Diversified Alternatives Fund.

“In our view, if this is good enough for the Canada Pension Plan, the approach can be adapted for retail investors’ own portfolios as well,” Mr. Seychuk says.

As he points out, the Diversified Alternatives Fund complements a traditional balanced portfolio of stocks and bonds. For advisors who don’t want to take on the time-consuming process of rebalancing, balanced approaches are a strong option. Mr. Seychuk calls them “a useful tool to allow advisors and investors time to focus other important areas, like saving, taxes, and other parts of the financial planning and wealth management story.”

To build balanced mutual funds that can perform well in up and down markets, Mackenzie combines stock picking with robust portfolio construction. The firm’s offerings cover a broad range of balanced categories and give investors plenty of choices when it comes to time horizon, risk tolerance and financial goals.

Younger or growth-oriented investors might opt for the $609-million Mackenzie Canadian Growth Balanced Fund, which aims for long-term capital growth by allocating to high-quality companies and diversified Canadian fixed income, including some limited non-investment-grade securities.

The downside-focused $1.1-billion Mackenzie Ivy Global Balanced Fund and the $1-billion Mackenzie Ivy Canadian Balanced Fund look for undervalued businesses while also investing in diversified portfolios of global and Canadian fixed income securities, respectively.

Mackenzie’s $1.7-billion Strategic Income Fund and $1-billion Global Strategic Income Fund fall into the neutral balanced category. Both vehicles, which seek to maximize relative return for risk, are 50 per cent equities and 50 per cent bonds.

Risk-averse or approaching retirement? The $1.2-billion Mackenzie Income Fund consists of about 30 per cent stocks and 70 per cent bonds and cash. Besides hunting for dividend-paying equities, Mackenzie Income Fund managers invest in bonds of a wide range of stripes.

In a change from just a few years ago, the average Canadian investor with a balanced portfolio can now also harness the power of alternative investments within a balanced portfolio framework, Mr. Seychuk observes. “We now have the ability to take the approach that we’ve been using for traditional assets within balanced mutual funds and adopt a similar approach for non-traditional or alternative assets,” he says. “That opens up an entire universe of investing options and possibilities.”

Because alternatives offer different return streams than traditional assets – and often lower volatility, especially in times of crisis – they have the potential to provide higher returns and/or lower risk. Picking winners in this broad category with a vast gap between the best and worst performers is no easy task, though.

“There can be a large gap in any given year between alternative assets that win and strategies that lose a lot of value,” Mr. Seychuk explains. “That makes it complicated for the average person and even a little bit scary.”

But that doesn’t need to be the case, Mr. Seychuk contends. “We think it’s all about the approach you take to the alternative asset class.”

With that in mind, Mackenzie designed the $126-million Diversified Alternatives Fund as a balanced fund that complements an investor’s current portfolio. “The key is to build a diversified portfolio of non-traditional assets that work together, and aim for a specific outcome” Mr. Seychuk says.

Mackenzie doesn’t consider non-traditional assets in isolation. “We’re using alternatives to make your total portfolio more efficient – that is, more return per unit of risk –,” Mr. Seychuk says. “And I think that makes the Mackenzie Diversified Alternatives Fund unique in the marketplace.”

Mackenzie launched Diversified Alternatives to improve the Sharpe ratio (which can be defined as excess return per unit of risk) of an investor’s overall portfolio, Mr. Seychuk says, noting too that since its October 2015 inception, it has more than doubled the Sharpe ratio of a traditional 60/40 portfolio of stocks and bonds.

What’s more, the Diversified Alternatives Fund has no performance fees and no liquidity restrictions or leverage . “This is available from Mackenzie in a standard mutual fund format, with daily liquidity,” Mr. Seychuk says. “It’s not a black box; it’s very easy to understand and see how it complements a portfolio.”

Mackenzie’s modelling suggests that for most investors, an allocation of 20 per cent to the Diversified Alternatives Fund and 80 per cent to a global balanced portfolio of traditional assets is optimal for boosting return and reducing risk. “We’re not suggesting people replace their traditional assets with alternative assets,” Mr. Seychuk emphasizes. “We are looking to provide an effective complement for their existing portfolio to help improve their overall success.”

Sponsored by Mackenzie Investments

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