With DC plan members facing significant hurdles in managing their own investment portfolios, what role can alternatives play in alleviating these challenges?

In his session at Benefits Canada‘s 2021 DC Plan Summit, Michael Sager (pictured), vice-president of multi-asset and currency management at CIBC Asset Management Inc., set out to answer this question. Liquid alternatives became available to individual investors following regulatory changes in 2018, he said, and it’s now a fast-growing sector.

“Many liquid alternative investments solutions have been launched since then and the assets under management have also grown strongly in the subsequent three years in this sector of the market.”

Read: 2019 Top 40 Money Managers Report: Investment lessons for DC plans from their DB parents

The benefits of this asset class is liquidity, accessibility and diversification, he said, noting the value that alternative investments add to a portfolio is very broad compared to a traditional balanced portfolio.

Within the sector, there are a lot of choices that have a different investment focus. “It’s not a question of one or the other. It’s not a question of substitutes. It’s very much a question of compliments and building a portfolio that includes liquid alternatives to maximize the investment breadth of the portfolio.”

Looking at the expected annual returns of various asset classes over the next 10 years, Sager pointed to a global balanced portfolio with an average expected return of 3.5 per cent alongside liquid alternatives with a gross expected return just above six per cent.

“The reason why a liquid alternative can plausibly expect to generate that much more performance on average than a global balanced portfolio comes back to that point about breadth— breadth in terms of asset classes where it can invest [and] breadth in terms of the ability to go long and short. Breadth . . . offers an accretive return that can be quite powerful in a portfolio.”

Read: U.K. consults on incorporating illiquid assets in DC investments

Another benefit of liquid alternatives is that they aren’t tied to the performance of an equity index or an underlying bond market, said Sager. “If we want more commodity exposure because we’re nervous about inflation risk, then we take more exposure in commodities and we dial down exposure to equity, for example. If we like particular currencies like the Canadian dollar, we have that opportunity to allocate some of the risk in our strategy or a liquid alternative more broadly into the risks we like against the ones we don’t like. And again, it’s that breadth and flexibility that really is the reason why a liquid alternative or a selection of liquid alternatives should be diversified.”

Sager also encouraged delegates to reach out to their record keepers and investment consultants to ensure the range of tools available to DC plan members is maximized so they have the best possible chance to achieve their long-term goals. “We think liquid alternatives are a key part of that toolkit.”

Read more coverage of the 2021 DC Plan Summit.