The Upside: Exploring alternative investing

 

 

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Subtitles are AI-Generated.

 

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Markets have become increasingly complex for investors making portfolio

 

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diversification and risk management more important than ever.

 

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Today we're going to explore the evolving role of liquid alternatives, how the

 

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category is growing, and touch on the newer solutions emerging within the

 

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space. Joining me today are Rory Pohl, Director of Alternatives, and Brandon

 

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Sims, Alternative Strategist at Fidelity Investments Canada.

 

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Rory, Brandon, thank you for joining me today.

 

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Thanks for having us, Lauren.

 

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Of course. So, Rory, why don't we start a discussion with you today?

 

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As mentioned in the intro, investors over the past quite a few years have had a

 

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very interesting experience through investing with higher rates,

 

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concentrated market leadership, and heightened volatility.

 

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Curious what impact this has had on the modern portfolio from your perspective.

 

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Yeah, it certainly had a number of different impacts on the various different

 

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types of portfolios that are out there.

 

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But if I were to distil it down a little bit, I

 

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think it depends on from what angle you're thinking about not

 

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only your portfolio, but the market's impact on that in

 

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particular. If you're think about it solely from a return standpoint,

 

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i.e. You're someone in short-term that's very fixated on, you know, how much am

 

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I? Earning in my investment portfolio, then I think what we've

 

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endured, particularly over the recent past, it breeds a

 

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little bit of impatience, if you will.

 

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There's been a large dispersion of return.

 

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And so what I mean by that is the worst performing, whether it's

 

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asset class, sector, theme within the market relative

 

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to the best performing, theme, asset

 

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class security, you name it.

 

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It's been a large difference between the two.

 

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As a result of that, you have a tendency

 

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or people, investors out there have a tendancy to want

 

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to make dramatic shifts in order to potentially capture

 

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some of that return. Some examples of that we've seen over the last little

 

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while is fixed income isn't as attractive

 

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as equity, and therefore I'm going to move all my fixed income into equity or

 

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AI or gold have been these popular topics

 

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over the past year or so. So let's take my real estate

 

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and my industrials exposure and my financials exposure

 

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and let's put it all into those areas.

 

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And I think that there's some risk in doing that.

 

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I'm all for changes on the margin for investors over time,

 

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but dramatic full-scale shifts like that.

 

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Typically doesn't work out over the long term for many investors.

 

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On the flip side of those that are fixated on return, I think

 

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that other people look at this more from a risk perspective.

 

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And what I mean by that is they look at some of

 

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those risks that you mentioned, whether it is, you know,

 

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very strong. Performance within equity markets, whether it's interest

 

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rates that have been rising, whether it is the worry of inflation, you name it,

 

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and they try and take a step back and think to themselves, okay, you know what,

 

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is this something that will remain in perpetuity or

 

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will continue to exist in the near to medium future?

 

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Or is it something?

 

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That I don't necessarily need to worry about right now.

 

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And going back to what I said before, are there marginal changes within my

 

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portfolio that I need to make in order to combat those potential risks?

 

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Mm-hmm. Thank you, Rory. It sounds a little bit more like a slow and steady

 

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wins the race approach, which is great.

 

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So Brennan, can we pivot over to you and dive into liquid alternatives and

 

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perhaps what role you've seen these fit into investor portfolios,

 

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navigating the market environment we set out, and maybe to Rory's point about

 

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making small, minute changes if liquid alternatives could be an option there.

 

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Yeah. So I think small minute changes is a great way to approach it.

 

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And I think what Roy was referring to was definitely a methodically devised,

 

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fully diversified portfolio. And I that if you ask a

 

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population of investors, you'd see many hands raised if you asked the question

 

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upon a shock, does most or all of the components of your portfolio move

 

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in the same direction at the same time? You'd see a lot of hands being raised.

 

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And I the goal of introducing fixed income or bonds

 

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broadly to an all encompassed portfolio.

 

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Would be to balance or provide sort of a counterbalance to some of the

 

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volatility that you have on the equity side.

 

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And to your point about fixed income sort of having been a challenging asset

 

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class over the past number of quarters and calendar years, it's factual at

 

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this point. We can't control what the future ahead will provide, but I think

 

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that as investors look to make those minute at the margin changes,

 

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it is an introduction to alternatives.

 

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And we are seeing that being funded oftentimes, not always, but oftentimes from

 

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the fixed income side of a portfolio.

 

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And we would see something that combines each equities in a long

 

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capacity, bonds in a long capacity in alternatives.

 

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Those alternatives under the hood can use equities, can use bonds, can be long

 

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short, can us other sort of instruments to provide unique exposures.

 

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And to the point about materials into our chasing goal.

 

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The last thing we wanna do in investing is chase.

 

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I don't think it gets to a great place. Trend following is different, but

 

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chasing is certainly not something we want to do.

 

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We do wanna make changes at the margin, and we wanna stick to a long-term

 

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methodical allocation that will sort of mould and bend over time, but we're

 

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not gonna be making sharp, sharp turns on a dime to turn our approach around

 

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just because something in the world changed around us.

 

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I think that it is really important that you have exposure to AI, that you have

 

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exposure to. Some more stable components in the portfolio that can be

 

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achieved through long bonds. But we just want to be careful to not have too,

 

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too much exposure and or exposure to interest rate sensitivity, which is

 

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something that we might touch on in a little bit. There's some very interesting

 

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things that you can do within alternatives.

 

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It's a growing space, there's a tonne of innovation, and you're able to

 

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get more niche prescribed outcomes through using some

 

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of these tools that are available at your disposal in alternatives.

 

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Mm-hmm. Thank you, Brandon. That's helpful and a really good reminder to our

 

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listeners to avoid really chasing headlines or jumping in there.

 

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So something Brandon did just touch on the emergence of liquid alternatives and

 

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them gaining popularity. Rory, could you touch on really what you believe is

 

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driving this momentum amongst advisors and investors with alternatives and

 

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what they're looking for in this space?

 

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Sure. I think what's driving this

 

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affinity, if you will, for liquid

 

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alternatives nowadays is there's

 

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a lot more proof points that investors have.

 

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These products have been around for the better part of about

 

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seven to eight years.

 

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And with the emergence of new types of strategies.

 

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And going through the ups and downs of a market cycle,

 

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as we'll continue to do in the future, there's more

 

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proof in the pudding in terms of the role that some of these products can play

 

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in someone's portfolio.

 

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So at a base level, it's kind of data.

 

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The second thing is the fact that, as Brendan kind

 

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of alluded to, and going back to your comments at the beginning, Lauren.

 

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We now have a lot of different types of tools that are

 

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available to the average investor that allow them to

 

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attack some of these key challengers or risks

 

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that are prevalent within today's market.

 

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So, with that investor profile that I mentioned at the beginning, someone

 

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that's focused on making sure that they stay diversified over

 

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time, is cognizant of.

 

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The risks or challenges that might permit them from

 

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achieving whatever financial goal they might have.

 

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There's a lot of different types of offerings that are out there and available

 

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for them. But I think at a base level, the last

 

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part of your question, what are people looking for out of these liquid

 

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alternatives? It's tough.

 

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It's not a one size fits all by any means, which I think is a good thing.

 

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But I think that advisors and investors are just looking for differentiation

 

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in various shapes and forms.

 

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For sure. Well, thank you for that.

 

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And you did touch on some more variety and accessibility

 

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for investors as well. So Brandon, I wanted to ask you, of course, we've seen a

 

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lot of different types of alternatives come to market and different competitors

 

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or players entering the space as well, could you touch on how this benefits

 

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you and investor?

 

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Yeah, absolutely. We just launched two new products just last week with, with,

 

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um, alternative bond as well as multi-all balanced.

 

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And I think that that's just an extension of what we've been doing over the

 

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past six years or so, which is growing out and innovating our shelf, but other

 

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solution providers on the street, uh, Canada wide actually are doing the

 

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same thing. So I do think that there's immense competition across the liquid

 

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all universe. And with competition, I think the end result is a good thing for

 

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consumers or, or for investors.

 

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You get increased competition leading to greater product innovation.

 

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You have to do more to do better and you're inevitably going

 

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to fill gaps in product lineups where there is investor demand, or at least

 

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that's what you're going to aim to do is we look, we canvas the environment, we

 

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say, where are investors looking to allocate that maybe there isn't presently a

 

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solution. With that comes the opportunity for cost competition too.

 

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I think that as you're doing this, as products are scaling and as more people

 

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are doing the same thing, there is a degree where you do compete on innovation,

 

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but you also compete on price. So I think at the end of the day, this

 

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competition is a great thing for the end investor.

 

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And we're seeing the space balloon by way of product count, as well as

 

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the breadth of offerings that are out there.

 

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We now have 10 liquid alternatives and one private solution in our line of

 

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power fidelity.

 

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As you mentioned, we did launch the Fidelity Multi-Alt Balanced

 

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Fund and the Fidelty Alternative Bond Fund.

 

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Rory, could you talk to us a little bit about these products and how they

 

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complement our existing lineup at Fidelity?

 

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Sure, the products themselves fill

 

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different needs and roles within investors'

 

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portfolios. Lauren, but maybe to simplify it for our listeners today,

 

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if I think a little bit about the different types of strategies we're trying to

 

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build for investors out there, I liken it

 

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a little to building a chess set for someone.

 

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So if you're familiar with chess at all, you know, you've got all these various

 

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different types of pieces, you know, pawns, rooks, bishops, kings, queens,

 

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they can all move in a different fashion around the board, you know, some only

 

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move forward, others can move forward and backwards, some can move multiple

 

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spaces, others can only move a few spaces.

 

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But ultimately, it is, you know, that collection or that set

 

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working together in order to help the player win and

 

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to liken that back to an investor and what we're trying to

 

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do with the alternatives lineup, we want to have different

 

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types of pieces available for investors to win at whatever their

 

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goal might be, but recognise that they

 

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all play their unique part in that process.

 

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That's a great analogy.

 

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Thank you for sharing that. To get slightly more granular, Brendan, with these

 

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products we are introducing, Liquid Alternative Credit, curious if you could

 

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provide a little bit of background to our investors as to why we got into

 

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that space and how it differs from traditional bonds in a portfolio.

 

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Yeah, so we launched Fidelity Alternative Bond last week, and that's going to

 

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be absolutely in the long short credit space.

 

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And I think that when it comes to investing both long and short in the bond

 

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space, there's a number of different things to consider that are not

 

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necessarily present in the equity space, but at the end of the day, it's not

 

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vastly different. We are using a long book and a short book in conjunction

 

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to combine our fixed income exposure into one resulting

 

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net portfolio. And I think that when you are short any

 

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financial instrument... That has a coupon or a dividend on the

 

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equity side of the fence, there can be a negative carry component of that where

 

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you actually owe that payment back to whom you borrow that

 

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fixed income security from. So at the end of the day, in these portfolios,

 

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there's many different things you can do, many different ways you can position

 

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the portfolio. But I would think that what you're able to do is you're

 

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to create a more niche portfolio, whether that's

 

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sensitivities to interest rates, overall volatilities.

 

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Where you're targeting across a number of different fixed income asset classes.

 

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So for example, if you're going to, say, play in high yield, that in and of

 

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itself encompasses a certain risk profile and or sensitivity to interest rates,

 

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whereas if you are participating with a long short approach, you can kind

 

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of counterbalance some of those exposures.

 

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And I think one other aspect within the alternative

 

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lens, if you would. Is the ability to manage that interest rate exposure using

 

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other financial instruments. And we won't necessarily dive too deep into that,

 

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but there's a concept called duration, which is your sensitivity to changes in

 

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interest rates. And I think that on a product of this nature, for example, we

 

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can be as much as, again, using a bit of industry terminology, we can four

 

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and a half years to negative two and a halfway years.

 

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And I think the ability of that to toggle and manage your exposure to interest

 

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rates through some of the tools that are at our disposal through that of being

 

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a liquid alternative product. Those are attractive and not necessarily

 

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available through long-only investing.

 

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Very good. Well, that brings us to time today, but really appreciate both of

 

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you walking us through all of the changes happening in portfolio construction,

 

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liquid alternatives, and how Fidelity is bringing new solutions and strategies

 

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to investors in Canada. So thank you both very much.

 

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Thank you. And thank you all for watching today.

 

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At Fidelity Canada, we're releasing new content daily.

 

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So please look up the Upside or Fidelity Connects podcasts for on-demand

 

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upside newsletter. Thanks for watching today and I hope you'll join us again.

 

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I'm Lauren Gardy.

 

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