In the new episode of the VELA Wealth Polestar Podcast, Kevin Parton, Partner and Senior Advisor, and Keith Allan, Portfolio Manager at Harness Investment Management, explore the world of alternative investments, offering a behind-the-scenes look at how VELA Wealth, Harness Investment Management, and Purpose Investments collaborate to unlock unique opportunities. They challenge listeners to rethink traditional portfolio strategies, emphasizing the importance of diversification with private assets like equity, debt, and real estate.
In this episode of the Polestar Podcast, you’ll learn:
• how VELA Wealth, Harness Investment Management, and Purpose Investments collaborate to unlock unique opportunities,
• why traditional portfolio strategies are being challenged,
• how alternative investments can revolutionize your portfolio,
• the power of diversification with private assets like equity, debt, and real estate.
About the Guest – Keith Allan
Keith Allan is a Portfolio Manager with Harness Investment Management. Harness has engaged in a strategic partnership with VELA Wealth and provides discretionary portfolio management for many of VELA’s clients. With more than 15 years of buy-side investment management experience, Keith brings a wealth of knowledge and experience to provide insight and guidance to clients regarding their investment portfolios. At Harness, Keith is responsible for developing and maintaining investment portfolios for VELA clients. Keith is dedicated to fostering long-term relationships with high-net-worth individuals and families by providing a clear and transparent vision to help them achieve their investment goals. To learn more, please visit Harness Investment Management team page.
About the Host – Kevin Parton
Kevin Parton, CFP professional, specializes in personal and business financial planning, tax reduction, and estate planning. Kevin is diligently concentrating on client education as a powerful strategy for building financial certainty. As no financial situation is the same, Kevin and his team monitor clients’ plans and implement personalized strategies to reduce their personal and corporate taxes, and protect their income, assets, and loved ones against the financial consequences of a serious illness, injury or death, ensuring clients maintain financial certainty and peace of mind. To read more, please visit the VELA team page.
The episode is also available on:
The Podcast Transcript
Kevin Parton:
Hello. This is Kevin Parton from VELA Wealth, and this is the Polestar podcast. I am lucky enough to be back here in the interview seat with portfolio manager Keith Allan. How are you doing today?
Keith Allan:
Doing well, Kevin, thank you for having me.
Kevin Parton:
All right. I’m excited about what we’re talking about today – alternative investments for a variety of reasons. In the last couple of years, it’s become quite a hot topic and I think there’s much to be explored both in the scheme of where alternative investments fit and how it relates to the average person. But, firstly, I want to talk about three different entities: VELA Wealth, Harness Investment Management, and Purpose Investments. Can you please provide some helpful context and explain the relationship between the three companies?
Keith Allan:
I can understand from a client’s perspective how it can get a bit confusing and convoluted at times when we’ve got several entities all commingling. I’d be happy to shed some light on each entity and explain what they provide and how they fit into the client’s overall financial landscape.
VELA Wealth is the wealth manager in the sense that they are the relationship manager for the client. They focus on planning the client’s entire financial landscape, including insurance and all other types of needs. Purpose Investments or Purpose Unlimited, as it’s called now, is the portfolio management entity and Harness Investment Management is the registrant under that umbrella. So, Harness acts as the fiduciary. As the portfolio manager, while I work exclusively with VELA clients, my licensing is through Harness Investment Management as the registrant. So that way I’m licensed with the Securities Commissions across Canada through Harness, which falls under the Purpose Unlimited umbrella. So, you can think of Purpose almost like a Black Rock or a Vanguard. Their whole MO is to bring products to market, ETFs, funds, and portfolios. They’re separately managed account portfolios, which are the same accounts we use for our clients. So, Harness was branched off from Purpose to provide these products to high-net-worth or ultra-high-net-worth clients and the retail landscape, which is where VELA comes into play. VELA has entered into a relationship or a strategic partnership with Harness to allow its clients the opportunity to invest in Purpose’s product through Harness. I’m hoping clients aren’t more confused after I explain that than they were before I explained it. I did my best to hopefully demystify the whole relationship between the three entities.
Kevin Parton:
From where I’m sitting, I think you did a pretty good job. It’s unique right now in the Canadian landscape, but this sort of platform makes what VELA is doing more and more accessible to the Canadian market. Historically, there have been large entities where everything was under one umbrella, but to operate in that space, you had to kind of preexist as a massive entity. And we’re in the age now of more boutique-style firms that can tailor and cater more specifically to their clients. This is the mechanism by which it’s done at a level people are familiar with.
Keith Allan:
Yes, exactly. I think the whole thing about the relationship and how this is structured is to give the clients the best of all worlds because it allows each person to focus on what they do best and to give that to the clients in context so that clients are ultimately enhancing not just their portfolio but their overall financial situation, whether it’s planning insurance investments, which are the three main entities of the family balance sheet. We want to be able to give our clients the best in class and this is the relationship that allows us to facilitate that.
Kevin Parton:
“Aces in their places” comes to mind as you are saying that this allows us to ensure that we have the best people for the job. This brings me to the next point and the purpose of this conversation – alternative investments.
So, as I was saying, alternative investments have become a common word or term these days to sort of fad level after 2022 when stocks and bonds went down in the same year and one of only a few historical years in which that’s been the case. It began a big conversation around the different assets you can invest in what are the alternatives? What do you do? I think a problem with it becoming such a common term is that it loses its meaning and where it originally came from, what it describes starts to sort of take on a mind of its own. And sometimes far worse as it gets used so commonly that that people think that they’re supposed to know what it means and then they don’t do the research into exactly what it is, or they try and delve into things themselves. This is where I want to start. What exactly is an alternative investment so that our listeners can be clear on the definition before we dive a little bit deeper into this subject?
Keith Allan:
So, alternative investments can be described or defined as an investment asset class outside of your traditional bonds and equities in cash. So, anything that doesn’t fall in that traditional stock blue chip equity, small cap, large cap stock, or your traditional bond, your fixed income, corporate bonds, government bonds, GICs, cash, or other money market instruments, would be considered an alternative investment. It can be anything from commodities to real estate to derivatives, private equity, private debt or private real estate, hard real estate infrastructure, or synthetic instruments that mimic real estate and provide a yield. Many different types of products can be defined as alternative investments, but the reality it should be something to be looked at outside of your traditional asset classes. And for us, that’s what’s important and what we feel will help drive returns for our clients moving forward.
Kevin Parton:
It sounds like there’s quite a large array of things that fall under the alternative asset classes, which kind of make and I think sort of lends itself to where the conversation 2022 is going is stocks, bonds, and cash are traditional, but a much smaller shelf relative to everything that falls under alternate assets. Then the next evolution is well, how are alternative assets being included in the design of a portfolio to sort of work in conjunction with the traditional non-alternative assets and who makes those decisions?
Keith Allan:
Traditionally, if you go twenty-thirty years back, alternative investments weren’t a part of the portfolio. Everyone talks about your classic 70/30 portfolio, 70% equities, 30% bonds, or your classic 60/40 portfolio, 60% equities, 40% bonds. Set it, forget it, move in. In our opinion, that type of portfolio structure is a very antiquated approach to investment management because the reality is we want to achieve alpha for our clients, and alpha is defined as the excess return above and beyond your benchmark. To do that in today’s environment, you need to be able to have other asset classes, uncorrelated asset classes to your traditional equities and fixed income. That’s how we look at alternative investments. And now it’s peeling back the layers of what type of alternative investments we want to use to achieve that alpha that we’re looking for. Like I said before, there are many different layers there, but for us, we want to drive return for our clients.
There’s an efficient market hypothesis where all available information is priced into the market at any given time. So, to truly achieve alpha, it’s almost impossible because all the information is showing in the market at that specific point in time. So, portfolio managers are somewhat obsolete if you believe this because there’s no chance to add alpha if you’re looking at public markets and traditional markets. If all the information is there. So, whether we believe that efficient market hypothesis or not, that’s a whole other discussion. But what we do believe is that we are not obsolete as portfolio managers, and we indeed can achieve that excess return. But we need to do it in non-traditional asset classes like alternatives. So, I just wanted to throw that little tidbit in there because I think it’s important that people listening to this understand -if you are a believer in efficient market hypothesis and all information is truly reflected in public markets, there is still a chance for us to return that alpha to clients and earn our keep, so to speak. We believe we can and we believe we’ve done that. So that’s a little bit of a sidebar, but I want to throw that in there.
Kevin Parton:
I appreciate you throwing that in there because of that. That is a common conversation around index investing and what people want to do with their money, and I think this is where alternatives play a role as it opens up the portfolio to sort of a litany of other as you said noncorrelated assets that are important and something that again keeps coming up now with sort of the big seven tech companies. Nvidia (NVDA.O) just almost reaching or passing 2 trillion as these indexes are made up by fewer and fewer companies or the moves that occur in there are as a result of what’s happening in fewer and fewer companies. So, I think to your point, the opportunity to add value is starting to grow because of the fewer and fewer companies in these indexes… but that is a conversation for another podcast.
Something that I know to be true at least, and maybe this is more of a question than anything, but alternative investments used to be only accessible to pension funds or institutional investors maybe because of technology or just sort of necessity has changed. I think that’s also why it’s become a more common discussion as alternative investments are becoming more and more accessible to retail investors. Can you talk a little bit about why that evolution has happened?
Keith Allan:
So that’s a great point, Kevin. And what we’ve done with Purpose and Harness is we’ve been able to bring product to market that normally to your point would only be offered in the biggest pension funds or the biggest money managers in the world managing billions and billions of dollars in a pension fund or a hedge fund. So, why should it just be the largest funds in the world getting access to these types of investments? We feel that our clients should be able to get access to those, maybe not in the same direct manner, but certainly very close in terms of how they hold it, and how it represents the overall asset allocation for their portfolio. So, what we’ve done is we’ve taken private assets, private equity, private debt, private real estate and unitized it to our clients so they can gain access to these types of investments. We feel very grateful that we’re able to do that through our partnership with Purpose and Harness and VELA because not a lot of investment managers out there can offer this to their clients in the unitized form. So, that again separates what we’re able to do for our clients outside of a lot of other investment managers.
Kevin Parton:
Which brings up two interesting points. The first one is – is this sort of a unique offering through Purpose, some different alternative assets that are available in this unitized mechanism? Is that unique for Purpose or unique with VELA or are these accessible at a litany of different firms in the market?
Keith Allan:
The answer to your second question is no. They are not readily available to other outside firms in the market. There are other private investments. If your portfolio is being managed by another firm, you may have access to other types of private investments.
Because of the strategic partnership we have, we’re able to gain access to these particular funds, but also at a price point that is very accessible for clients and they’re not paying unreasonable management fees to get access to this. I think that what separates us from other firms is that we’re able to get access to them, but at a price point that is very enticing for clients and they’re not paying a gigantic management fee like they would be elsewhere.
Kevin Parton:
Fair enough. I guess that the barrier to entry into these products as far as a dollar amount isn’t so high that it limits who can access them.
Keith Allan:
Yes, exactly.
Kevin Parton:
I know that Purpose has a relationship now with three different alternative investments. Are you able to speak a little bit to those three at this point?
Keith Allan:
Yes, absolutely. So, Purpose has partnered with three firms based in the United States that specialize in private assets. In that partnership, they’ve launched three separate funds, private equity, private debt, and private real estate. Purpose has now been able to bring this to the Canadian marketplace for clients that are partnered with Purpose, Harness, or VELA, and provide these funds for them.
The private equity fund is partnered with a firm called Pantheon in the United States, the private debt is with Apollo and the private real estate is with a firm called Blue Rock. So, together with each of those three firms, Purposes has created a fund that is sub-managed by those aforementioned firms, but available to Canadian retail investors. The track record for all these firms is remarkable which is why Purpose decided to partner with each of them respectively, for that particular asset class. Due diligence has been done and the companies have been vetted after a lot of research, it was decided these were the best partner firms to go with to provide these private assets for the clients.
Kevin Parton:
If I’m hearing you’re right, when we started talking about alternative investments, there was a very large array of available things that fit under that category and what Purpose is done is to acknowledge all the options that exist and kind of distill it down through a rigorous process and now said, “So, these sort of three options are the best that we want to offer on our platform or to our clients within the alternative asset space?”
Keith Allan:
Yes, exactly. So, I think there is a huge appetite from investors for private assets. I know in the beginning I talked about how commodities, derivatives, and other types of assets could be deemed alternatives. However, the largest appetite amongst retail investors is for private equity, private real estate, and private debt. It is difficult to be able to access that in the Canadian landscape. So, Purpose knowing that there is a huge demand for this from investors across Canada, focused on the initiative to be able to establish 3 funds in those private assets and be able to bring them to market for retail investors.
So, we feel that the private equity, the private credit or private debt, and the private real estate sort of tick all the boxes in terms of increasing diversification for clients from traditional asset classes, as well as providing a reliable income stream because all of these funds pay a distribution quarterly and enhanced returns or achieve the alpha that I spoke about earlier. Those three funds do all three of those things, which is why these are the ones that we feel are best suited for our clients moving forward.
Kevin Parton:
Right, okay. Now that we talked about that, how do you decide what fits into a portfolio? You talked about the traditional 60/40 or 70/30 portfolio structures earlier. What the mix is supposed to be if you incorporate alternative assets in there?
Keith Allan:
I think ultimately it comes down to each client, their appetite for risk, and their ability to take on risk because undoubtedly these private assets do carry more risk than perhaps your traditional equities and bonds, which is why they’re able to ultimately achieve higher returns. It’s a direct correlation between the risk you’re willing to take and the return you are getting. Now there is some volatility and there are certain restrictions within these funds in terms of being able to get your money back, being able to put money in, and withdrawing it. They’re not overly restrictive. It’s not like you put your money in and you’re never going to get it back, but there are some restrictions in place and clients need to be aware of that when they do invest in these types of funds as they aren’t as liquid as traditional public equity or public debt. So, we are being able to weigh that for clients. What is their appetite for risk? What is their asset allocation? What are they looking for? And for some clients, it might not be appropriate. We feel that for most clients it is because again, we want to be able to drive return for clients, and to do that, we need to be able to diversify the portfolio. Certainly, for clients that rely on taking income out of their portfolio every month or have a huge upcoming purchase, we may not look to go private as much as we would for a client that has a long time horizon and does not require true liquidity needs at this point. So, every client has looked at it on a case-by-case basis to truly understand if these types of investments are appropriate for them.
You asked me what is the traditional or the new asset mix that we should be looking at. Well, I can’t answer that because as I said, every client is different. We feel that it’s entirely appropriate, or else being equal, for clients to have roughly between 8% and 12% in private assets just given the current climate, and for some clients, it will be less. I don’t necessarily know if we would ever go more than that, but 8% to 12% is what we look at in terms of private assets and alternative assets. Right now, those alternative assets are made up primarily of private equity, private debt, and private real estate.
Kevin Parton:
Great. I guess with the change in interest rates, cash is a little bit more of something you’d consider in a portfolio. So, the traditional mix was equity fixed income and now it looks like alternatives and cash can be in positions three and four within the building of a portfolio. I only mentioned that to say that when you talked earlier about alpha and adding the values of portfolio manager, well, when you double the assets, you tend to consider putting in a portfolio that adds a little more complexity. Can you tell us what sort of the changing environment both in bringing alternatives into portfolio management more readily and fluctuating interest rates does when you’re looking at portfolio construction?
Keith Allan:
Well, we’ve said for some time now that cash is an asset class, whereas before it was kind of just a sidebar, right? We always hold a little bit of cash in client’s portfolios, but we did not truly look at it as an asset class because there was virtually no yield on it. But now when you’re seeing banks offering very high interest rates and we have our cash product that we offer for clients that yields well north of 5% you can say that this is an asset class for clients. When we build out a portfolio, we’re looking at equities and fixed income, but cash falls right next in line to that, and again, alternatives, private equity, private debt, and commodities. Are we going to go ahead and hold 20% cash for clients? Well no. That will not be a good job as portfolio managers If we’re just going to say, “We’re going to hold 20% cash across the board”. We might hold a little bit higher than normal in client’s portfolios in cash to provide us the opportunity to act when there’s an asset or a particular name we like and we want to be able to deploy that money easily and readily. You’ll be getting a 5% yield on that, while a lot of bonds weren’t offering that. So, we can put that money there, get the tidy yield on it, and have it readily available for us to deploy, right? But again, it’s not stagnant and it’s always dynamic. We’re always thinking about what are we going to do in two to three months from now, do we want to have cash available, and what other types of assets are we looking at to enhance the return and drive return for our clients. So, yes, cash is an asset class. It’s not always going to be an asset class.
I think to your point about interest rates, we’ve seen interest rates drop to historical lows during COVID-19 and now they’ve jumped back up to highs that a lot of the population haven’t seen in their lifetime. What’s going to happen next? Well, inevitably, interest rates will come down. I know they haven’t yet. The Bank of Canada has gone on record saying that probably at some point this spring, the US Fed same deal. So, as the interest rates come down, fixed income is going to rise, and the value of fixed-income assets moves inversely to what the interest rates do. So, there may be an opportunity to hold more fixed income or other types of assets that are going to increase in value. But right now, we’re still active in holding cash for clients and we think it’s prudent to do so.
Kevin Parton:
Great. I’m going to try and summarize some of the points we went over today. So, we started with talking about alternative assets, which are effectively anything outside of cash, stocks, or bonds. The list was quite large, but we sort of narrowed that down to where the appetite is, which is private debt, private equity, and private real estate. Purpose has done its due diligence and found three big players in each of those spaces such as Apollo, Pantheon, and Blue Rock, which have been unitized to give our clients access to really good quality private assets as a part of their portfolio, especially through 2022. It’s become apparent that the traditional mix of stocks and bonds isn’t necessarily what’s going to be advantageous going forward. So, it’s becoming more and more prudent to include alternative investments or private assets in the portfolio. That is a decision that’s made on a case-by-case basis based on clients, but being somewhere where you can gain access to that type of advice is what’s going to become a differentiator or a difference maker.
So, I think that’s kind of where we can summarize everything we’ve talked about so far. I’m going to turn it back over to you, Keith. Can you please give one or two bits of advice or talking points to your perspective on alternatives before we wrap this up?
Keith Allan:
Thanks, Kevin. Everything you said there is a perfect summary of what we spoke about. The one piece of advice I would give is to be open-minded and be able to think outside the box and outside of the antiquated 70/30 or 60/40 portfolio. If you’re looking to drive value moving forward and enhance return in your portfolio the 70/30 portfolio will do its thing but ultimately you need to be able to look outside traditional assets to truly drive return. We as a team have done a lot of work on this and really done our due diligence in terms of understanding what private assets mean in portfolios, and how they can diversify portfolios and provide uncorrelated returns to traditional asset classes. So, I think for people that don’t know a lot about private assets or have a negative connotation as they have heard a friend who got into some private fund and lost all… Well, no, that’s not the private assets we’re looking to add, it doesn’t work like that as these have been vetted, due diligence has been done and we truly believe that they are going to drive value for our clients.
Kevin Parton:
Awesome. I appreciate it. I think this is great information for our listeners so that they can get a little bit of an inside scoop and understand more about alternatives and private investments. We’re always available if there are additional questions. Thank you for your time and I look forward to talking to you again soon.
Keith Allan:
Absolutely. Thank you for having me, Kevin.
Disclaimer
The information provided in the podcast transcript is designed for general informational purposes only and is not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.