Is It Time to Consider Investing in Alternatives?
Amid fears of a global downturn, major institutional investors like banks and pension funds are speeding up their exit from the public markets and shifting instead to private alternatives.
That was the message from Blackrock’s annual survey of their institutional clients released this month. More than 68% of Canadian or U.S. institutions surveyed said they plan to dial back their allocation to public equities and increase their investment in alternatives like private equity, real estate, and real assets in 2019.
Alternatives have long been used by institutional and the high net worth investors to take some money off the table during periods of market uncertainty– but what if you’re an average investor with a lower appetite for risk and $5000 to invest rather than $5 million?
The case for adding alternatives to your portfolio (Hint: it’s all about diversification)
You can think of alternative investments as “alternatives” to stocks, bonds, and cash–the three asset classes generally found in a basic portfolio. It’s a broad term that includes investments in private equity, real estate, infrastructure, commodities, hedge funds, even art.
Whether you’re an institution or an average Canadian, there’s a one-word argument for investing in alternatives: diversification.
Alternative investments typically have a low correlation to stocks and bonds and as a result, can play the useful role of diversifying your portfolio and limiting volatility in times of uncertainty. Returns from infrastructure investments, for example, are generally not linked to the market: an energy generation facility will continue to heat your home regardless of how the TSX performs.
Of course, there are trade-offs. While investments aren’t exposed to market downsides they aren’t exposed to the upsides either.
As you may have gathered from the list above, alternatives vary greatly in terms of risk, return expectations and other features. Many investments in the alternatives space are inappropriate for retail investors (that’s most of us) due to high risks (e.g. hedge funds) and/or inaccessible due to high investment minimums (e.g. billion dollar infrastructure projects). There are, however, a growing number of exceptions.
CoPower Green Bonds: An alternative investment for Canadians
CoPower’s 6-year, 5% Green Bonds are a new option designed for Canadian retail investors looking for an accessible alternative. They’re an investment in real assets: a diversified portfolio of loans to small-scale clean energy projects. Today, that portfolio contains loans supporting more than 1,100 Canadian projects, including solar, geothermal, and LED retrofits.
As noted above, returns on alternative investments aren’t linked to public market movements bringing that desired diversification. In this case, CoPower lends to projects (or portfolio of projects) that sell clean energy or save energy. The money generated (or money saved) is used to repay the CoPower loan. Those loan payments, in turn, generate the steady, predictable revenues used to pay interest to bondholders.
This model, supported by the excellent economics of renewable energy, allows CoPower to finance smaller renewable energy projects in an efficient manner and offer competitive fixed returns of 5% annually over a 6-year term.
To mitigate risk and ensure the bonds are appropriate for retail investors, CoPower selects projects that use widely available commercial technologies and that typically have strong contracts in place for the purchase of the clean energy or energy efficiency services. Of course, insurance, warranties and debt-service reserve funds are in place for added protection and to smooth payments in the rare event of a technical problem, default or delay in payment.
A private investment and a “liquidity premium”
As is the case with most alternatives, CoPower’s bonds are private investments, meaning they aren’t traded on the public markets. The advantage, as outlined above, is that they aren’t exposed to market sentiment and can you help you diversify. It also means that they can’t be sold and investors must be comfortable holding their bonds to maturity.
To compensate investors for locking up their money for a set number of years, private investment returns typically include a “liquidity premium.” Returns are higher because you’re taking on the risks that come with leaving your money put.
How to invest
In addition to the 6-year, 5% Green Bond, CoPower also gives investors the option of a 4-year, 4% Green Bond.
Alternatives often come with high fees, but one of the benefits of investing directly with CoPower is avoiding brokerage or advisor fees.
If you purchase a 6-year, 5% Green Bond, you can expect to receive the full 5% annually. Investors also have the option of investing via a TFSA or RRSP to maximize tax benefits; however, it should be noted that most custodians (eg: financial institutions, wealth advisors, brokerage platforms) of registered accounts charge private placement and/or holding fees. The simplest and cheapest option for most investors is through Questrade; and CoPower has outlined the process here.
To-date, more than 700 Canadians (including individuals and institutions) have invested more than $30 million with CoPower, including more than $18 million in Green Bonds. To learn more visit CoPower.me.