Variety is the spice of life, and when it comes to your investments, owning a range of asset classes—or ‘diversifying’—is an essential ingredient for a well-balanced portfolio. Connor, Clark & Lunn Private Capital (CC&L Private Capital) has responded to this by seeking out and incorporating into its investment platform a number of alternative investments. This means that beyond the typical diversification tactic of owning public-market equities and bonds, savvy clients at CC&L Private Capital may now consider enhancing their balanced portfolios with investments in alternative asset classes, such as commercial real estate, infrastructure and the firm’s latest addition private loans.

It’s worth remembering why diversification is important. Pairing up assets whose values don’t tend to move in the same direction at the same time—a typical example is equities and bonds—can significantly decrease the risk in an investment portfolio. This is considered a benefit because the value of a less risky portfolio will usually change more steadily over time than the more frequent and sometime larger swings of a riskier portfolio.

What this means is that including alternative asset classes, such as commercial real estate, infrastructure or private loans, in the stocks-and-bonds portfolio of a client with a medium level risk tolerance can help do one of two things: either reduce the portfolio’s risk without giving up overall expected returns or increase the portfolio’s potential for growth while maintaining the same level of risk. Which of the two outcomes prevails generally depends on the characteristics of the portfolio and asset classes chosen.

Common characteristics of these alternative investments include attractive yields and a relatively low correlation to traditional asset classes. Commercial real estate and private loans, for instance, can provide stable cash flows over a known duration, while infrastructure investments can be less affected by economic cycles than traditional asset classes and have the potential for long-term capital appreciation. In this way, alternative assets can help a portfolio minimize the effects of the ups and downs in public market asset prices.

CC&L Private Capital gives its clients the opportunity to diversify their portfolios by investing in any of three different alternative asset class funds. The commercial real estate fund, which has been investing in office, industrial and retail real estate for over seven years, now counts over 200 properties across Canada within its portfolio. Investors can benefit from the real estate fund’s strong cash flow characteristics with potential for capital appreciation. The infrastructure fund allows investors direct ownership of assets that can include hospitals, roads and solar and hydro energy production projects. Having recently expanded outside of Canada by making its first investment in a Chilean solar project, the fund’s low exposure to economic cycles makes it useful for diversifying a balanced portfolio. The firm’s latest offering is a fund that originates, underwrites and manages a portfolio of secured loans to mid-market Canadian companies that require unique financing solutions. The private loans fund provides investors with the potential for enhanced returns compared to public market bonds, and like the infrastructure fund, its performance isn’t reliant on the direction of financial markets.

When appropriate, CC&L Private Capital may recommend a modest allocation of alternative investments to a client’s balanced portfolio. But it’s worth remembering that these asset classes may not be suitable for everyone: they can be illiquid, making it difficult to exit at short notice, and also possess risks that should be considered when deciding to invest.

The reason why many investors haven’t already baked alternative assets into their portfolios is simple: a lack of opportunity. Until more recently, only large institutional investors like pension funds and insurance companies had access to these specialized asset classes, but that’s been changing as more private and smaller institutional investors learn about the benefits of holding ‘alts’. To match this growing demand, CC&L Private Capital has been offering clients the ability to own a range of investments—the firm was the first to the Canadian marketplace with pension-style, alternative asset classes—but unfortunately the opportunity still isn’t commonplace. Adding these asset classes may be worthwhile though, as including alternative investments in your portfolio can help satisfy your appetite for diversification.

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