Travis Forman, Portfolio Manager at Strategic Private Wealth Counsel – Harbourfront Wealth Management.
The past year was filled with turmoil and market volatility. It was unpleasant and, at times, downright painful. While most of us are happy to say goodbye to 2022, there is still plenty of uncertainty in store for this year—but despite this, many don’t plan on putting their investment activities on hold. They do, however, want to know where the experts are investing and how they plan to invest over the course of the year.
Below are the areas many experts are focusing their attention on this year.
Alternative Investments
We’re all familiar with traditional asset classes, like publicly traded stocks and fixed income, but there is a world beyond that. Any asset not part of the conventional classes is referred to as an “alternative investment” or “alts.” Alternative investments include assets such as real estate, infrastructure, private equity, venture capital, hedge funds, private debt and more.
Alternatives are unique in their risk and return characteristics, making them a popular addition to portfolios. By including an allocation to alts, an investor can further diversify their holdings—which is known to decrease a portfolio’s overall risk. Should this year be just as tumultuous as the last, diversification will be key to protecting against market selloffs and volatility.
Private Credit
Private credit has become a “go-to investment,” especially during the recent period of record-low interest rates for investment experts. For those comfortable with private debt, they know products within this asset class typically provide higher yields than traditional assets, and in reality—this goes for the entire private market—considering private credit also pays a greater yield than traditional fixed income.
The days of near-zero interest rates are now over, but that does not mean private credit should be left in the dust. Instead, it remains a favorable investment, and the asset is expected to maintain its appeal. The reason is that the loans tied to private credit tend to have floating rate terms, meaning the borrower will pay more as interest rates rise. Given that rates have increased rapidly over the past year and will continue to climb in 2023, a floating rate investment can make a significant difference in your portfolio.
The nature of private assets is that they do not trade on public exchanges, and there is often no secondary market. While the illiquidity and long-term nature of the investment may seem inconvenient, it can actually be an advantage for investors. In volatile markets like the one we are currently experiencing, we can see the value of a publicly traded asset swing dramatically throughout just a few cycles. As private credit does not sell this way, the market value will remain stable over the short term.
This is not to say that private debt is immune to losses because it is not, but more so that you will likely experience less variability day to day. After the volatility we saw in 2022, I’m sure most investors could understand why avoiding the roller coaster ride of traditional asset prices could be beneficial.
Real Estate As An Inflation Hedge
While the central banks have been working to bring inflationary forces down, many economists agree that we will see elevated inflation for a while longer. If inflation becomes entrenched, it can be valuable to purchase assets that help hedge against rising prices. One of the assets that fit this criterion is real estate ranging from direct ownership, publicly traded products such as real estate investment trusts (REITs), and/or private real estate.
Real estate helps hedge against inflation through rent. As prices rise, short-term rental contracts can be adjusted, with the owner charging a higher price for the same property. This means that the landlord is earning more at a time when everything costs more. In the case of a direct ownership stake in rental apartments, for example, the property owner is the one to pocket the additional dollars. With products such as REITs, the unitholder will ultimately receive extra income from rent.
The ability to keep up with inflation is just one of the benefits of investing in real estate. Another is that it offers diversification benefits due to its earning structure and associated risk. Since the asset is uncorrelated with traditional markets, it will not mirror the same returns as conventional assets. At a time of uncertainty, elevated inflation and jittery markets, investors can undoubtedly benefit from having a well-diversified, inflation-protecting portfolio.
Takeaway
As we move into another year filled with economic uncertainty, smart money is investing to diversify portfolio holdings and protect against rising prices. A few assets that may help in this quest are alternative investments, private credit and real estate. As always, consult an investment professional for specific guidance on how these investments might fit into your portfolio.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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