Hello everyone, and welcome to the Retiring Canada Podcast. In today’s episode, we're going to discuss pension-style investing for the retail investor.
Specifically, we will cover:
- What is pension-style investing?
- The Canadian Pension Plan and how it utilizes alternative investments.
- The five benefits of adding this kind of diversification to your portfolio.
- An accessible version of pension investing for Canadian investors.
- Who is a good fit for these kinds of investments.
- Lastly, a few actions items for you to consider.
So today, I am going to be discussing something we call Pension Style Investing.
When most of us think of investing, we think of the stock market – investing in publicly traded equities. While most retail investors compete for the same limited number of public companies listed on global exchanges, tens of millions of private businesses exist worldwide, many of which also seek to raise capital by issuing equity or borrowing from investors.
Investing in private companies is not new, but for the most part, has only been accessible to institutional investors such as pension and endowment funds, charitable foundations, and the ultra-high-net-worth.
That is… Until now.
Harbourfront Wealth Management has access to investments in retail-friendly private businesses, including private equity, private credit, and private real estate. These are often referred to as alternative investments or private securities. These types of investments may provide portfolio stability and typically offset the volatility that exists in equity and fixed income markets.
And this is why the most sophisticated investors in the world are allocating more of their assets to Alternative Investments due to unstable bond yields, extreme central bank intervention, and the threat of overheated stock valuations. Investors in the know believe that Alternative Investments will give them a better chance of achieving sufficiently higher – risk-adjusted – returns to meet future obligations while protecting against excessive downside risk.
But don’t just take my word for it. You can actually see with your own eyes how large endowment funds like Yale and Harvard, and even the Canadian Pension Plan allocate a portion of their investable assets to private securities that are not accessible to your average Canadian investor.
Take the Canadian Pension Plan as an example. If you are contributing to CPP right now, every dollar you send them is being invested for your future benefit. Right on their investment home page they state, quote:
“We are invested globally across public equities, private equities, bonds, private debt, real estate, infrastructure, and more.”
In their 2023 annual report, the CPP investment board stated they manage $570 billion dollars of your money, and of that, approximately 55% of the assets they manage, nearly $313 billion, are invested in Private Equity, Private Real Estate, and Private Credit.
Private equity alone is the largest overall allocation in the fund at a staggering 33%!
Furthermore, the five-year annualized net returns of these private assets have been a significant contributor to the fund's overall performance, with private equity consistently being the largest contributor to overall CPP returns.
You can see all of this for yourself in the 2023 Annual Report. Check out the link in the description to open the PDF document and read pages 34 to 36 to see the information I am referencing here.
So why are institutions, endowment funds, and pension funds utilizing these types of alternative investments? Well, here are some of the core benefits:
First, it adds diversification. Whenever a wealth manager adds different asset classes with different investment and risk profiles, the result is generally lower overall risk in that portfolio.
Second is low correlation. Investments that have low correlation typically complement one another as we go through market cycles. That has been the thought behind your typical 60/40 balanced portfolio between public equities and public fixed income. However, we witnessed this traditional low correlation benefit decouple during 2022. As in, both equity and fixed income went down at the same time.
This is where adding alternatives that have low to zero correlation with equity markets and traditional fixed income options create a more efficient portfolio.
The third benefit is the reduced drawdowns in your portfolio. Uncorrelated assets will perform differently at different times. Alternatives historically perform more consistently than stocks and bonds with lower volatility, protecting portfolios from large drawdowns or losses.
Next is the potential for better risk-adjusted rates of return, often measured by the Sharpe Ratio. This is a calculation of the profit potential from an investment that factors in the degree of risk that must be accepted in order to achieve it. With lower volatility than fixed income and equity but high-income streams, alternatives can provide risk-adjusted returns suitable for some investors.
And lastly, one of the core benefits is overall investor satisfaction. When combined, lower volatility, reduced drawdowns, and more consistent income streams create happier, more satisfied clients. Period.
In my opinion, the greatest benefit to clients, other than better overall satisfaction, is the reduction in drawdowns during market volatility. So let me break that down for you a bit further.
A market drawdown occurs when an investment or portfolio of investments goes from its peak-to-trough decline during a specific period of time.
Reducing market drawdowns is especially important for retirement investors who are withdrawing money from their investments on a month-to-month basis to support their lifestyle. As investments go down, more shares or units of that investment need to be sold in order to get the same amount of income in your bank account.
Take this out over six months, a year, or even two or three years, and you can start to get a sense of how a sustained drawdown can add substantial risk and may materially impact your ability to stay retired.
Now there are other strategies you should be implementing into your retirement plan to help mitigate these types of sustained drawdowns, other than just choosing a suitable investment. I covered one of these retirement income strategies called retirement income guardrails in a recent episode, so I encourage you to check it out.
Alright, so where does this leave you?
This is where pension-style investing through our platform known as the Watermark Private Portfolios may start to make some sense, especially for those of you who don’t like to see big swings in your portfolio but still want to earn a decent return.
Typically, gaining access to alternative investments has ONLY been available to pension funds, endowment funds, and the ultra-high-net-worth. Until now.
Now, a quick disclaimer before I get a bit specific on Watermark Private Portfolios.
At Harbourfront Wealth Management, our team at Fundamental Wealth has the ability to provide independent, unbiased wealth management advice. What that means to our current and future clients is that during the wealth management process, we are not beholden to any one investment solution, product, or company.
We sift through the options available, prepare our recommendations, and give our clients the freedom and choice to make an informed decision, free from conflicts of interest or a restricted product offering. True independence.
With that, the Watermark Private Portfolios are only available to Harbourfront clients but are by no means a requirement.
Understanding our clients' goals, aspirations, experience, knowledge, expectations, risk tolerance, and timeline are the key drivers in helping clients choose a suitable investment vehicle for their life savings.
Ok, so let me give you a quick rundown of our version of pension-style investing, Watermark Private Portfolios, and who it may be suitable for.
The Watermark Private Portfolio program is a unified managed account using a multi-strategy, total portfolio solution consisting of stocks, bonds, ETFs, private equity, private credit, private real estate, and managed investments all in one account.
Our discretionary portfolio managers can provide additional tactical asset allocation, whereby the team can implement short-term adjustments to be responsive to the current market environment to take advantage of buying opportunities and protect from market drops. The goal here is to provide further fine-tuning of the portfolios in accordance with our client's risk profile and to improve the investment experience.
At the core of the Watermark Private Portfolios are the holdings in the alternative investments we have been discussing: Private Equity, Private Credit, and Private Real Estate.
The unique aspect of our private securities is the use of a sub-advisor model. You have heard of the saying "not all of your eggs in one basket." Well, we believe the same is true when building our basket of private offerings and completing our due diligence. These holdings are well diversified, and risk is not concentrated in any one sub-advisor.
If you were going to climb Mount Everest, would you prefer to have one guide and hope for the best, or a team of Sherpas and experienced veterans who have been there before multiple times?
As I said, the holdings of the pooled private securities go through extensive due diligence and are evaluated continuously throughout the investment lifecycle.
Through our comprehensive due diligence process, our third-party investment fund managers are assessed across various stages as we aim to diversify counterparty risk and achieve consistent risk-adjusted returns.
Now I have talked a lot about the benefits of pension-style investing, let’s take a moment and describe who may be suitable for the Watermark Private Portfolio.
- I am a long-term investor who wishes to build wealth by following an investment plan.
- I want a discretionary portfolio manager in my corner doing the heavy lifting and who is responsive to changes in the market environment to take advantage of buying opportunities or protect me from market drops.
- I want to have a smoother ride in my investments and no longer want to stomach big ups and downs, especially as I navigate retirement income withdrawals.
- I understand the value alternative investments have brought to the Canadian Pension Plan and would like to have similar portfolio construction.
- I want to have an overall better investor experience.
Does this sound like you?
Alright, so that does it for today. Thank you so much for joining me today.
Before I wrap up, let’s go through a few action items for you.
First off, please visit our website – fundamentalwealth.ca/WPP to download the Watermark Private Portfolio booklet to learn more about this style of investing.
Lastly, have a look at your most recent investment statement. Do you have any alternative investments to add diversification and risk reduction in your portfolio?
Ok, so that will do it.
For the links and resources discussed, please check out the link in the show notes or visit retiringcanada.ca.
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All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.