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iStock.com \/ Martatommy<\/p><\/div>\n
Clients don\u2019t often complain when stocks go up. But markets that are constantly setting new records, coupled with stubbornly low bond yields, create a problem: everything is expensive. Some investors are looking for diversification in new ways.<\/p>\n
Some new alternative asset classes claim to be even less correlated to markets and the broader economy than more traditional alternatives, and so-called \u201cpassion assets\u201d may interest clients on a personal level. Alternatives are less regulated, less liquid and less transparent, and some come with significantly higher fees than retail products. But they can also offer stable returns divorced from long-only markets.<\/p>\n
Here are three ways to invest that your clients may not know about.<\/p>\n
What: Fine wine<\/h2>\n
Former Vanguard Canada chief executive Atul Tiwari launched Cult Wines Canada in April, a joint venture with U.K.-based Cult Wine Ltd. Investors get managed portfolios of fine wine bought by the case and stored in a London City Bond warehouse or a similar facility in Bordeaux, France, where the wine is meant to appreciate in value.<\/p>\n
Minimum investment:<\/b> $45,000 for managed portfolios; $12,500 for the robo version, which uses an online risk assessment and doesn\u2019t involve a dedicated portfolio manager<\/p>\n
Assets:<\/b>About $330 million globally, or 650,000 bottles under management<\/p>\n
Expected returns:<\/b> Since 2009, 12% average annualized return across all Cult Wines portfolios<\/p>\n
Who it\u2019s for:<\/b> Emerging high-net-worth investors with more than $500,000 in assets (though the robo version lowers the threshold); wine lovers<\/p>\n
Fees:<\/b> 2.75% annual management fee for the $45,000 account, with the fee decreasing for larger investments; for the robo version, 2.95% annual management fee for $12,500<\/p>\n
Recommended allocation:<\/b> 5%\u201310% of a portfolio<\/p>\nHow it works:<\/h3>\n
Every year roughly US$450 billion-worth of wine is produced, but only about 1% is investment-grade, Tiwari said. Portfolio managers assess a client\u2019s risk tolerance and areas of interest, and build a portfolio of fine wines based on research and algorithms that take weather, tariffs and other factors influencing wine prices into account.<\/p>\n
To avoid concentration in a few pricey vintages, the average $45,000 portfolio holds about 250 bottles (or about 21 cases) that cost between $150 and $200 each.<\/p>\n
Investors should expect a three- to five-year time horizon for each position, Tiwari said. The value of a vintage generally appreciates for five or six years after its release before plateauing. Consumption then decreases the supply and prices rise again. Investors usually sell well before the value peaks: \u201cFrom an investment perspective, the risk-reward of hanging on too long isn\u2019t worth it,\u201d Tiwari said. Approximately 20% of the portfolio turns over every year.<\/p>\n
Investors can choose full discretionary managers (most common for Canadian clients) or advisory accounts where clients are more engaged in portfolio selection. The latter may interest oenophiles or those wanting to learn about wine by investing.<\/p>\n
Benefits and risks:<\/h3>\n
Wine has proven resilient to recessions, Tiwari said. Price volatility is low (about four standard deviations, compared to 15 for the S&P 500), which Tiwari attributes to the makeup of the market: investors, restaurants and wealthy consumers. \u201cYou just don\u2019t have panic selling,\u201d he said. The Liv-ex Fine Wine 1000 index, which tracks 1,000 wines across the world, saw a much shallower dip and faster recovery than equities markets during the global financial crisis in 2008 (a low in December 2008 was about 10% below its peak) and early in the pandemic (a 4% decline in March 2020).<\/p>\n
But wine could be hard to sell. This is especially true if the buyer can\u2019t be assured of its proper storage and authenticity. \u201cWe won\u2019t go out and buy a 1947 Bordeaux for our clients. It\u2019s just not worth it,\u201d Tiwari said. \u201cThe provenance would be hard to guarantee unless you\u2019re getting it straight from the producer. And much of the price appreciation has probably occurred already.\u201d<\/p>\n
There are also macro risks such as tariffs and climate change, which make diversification across regions and vintages important. Wildfires ravaged California\u2019s Napa Valley in 2020, while late frosts caused severe damage to French vineyards in April. A reduced 2021 supply could increase demand for recent vintages, Tiwari said, so clients may see opportunities to buy a 2018 Bordeaux, for example, and expect higher returns.<\/p>\n
Objections to financialization?<\/h3>\n
\u201cThere are some wine lovers who feel that wine is meant for enjoyment and its ethereal qualities, as opposed to the crass or economic aspects of the bottle,\u201d Tiwari said. \u201cThey love the romance of the small producer \u2014 a farmer making this bottle of wine that\u2019s meant to be bought and consumed by the person who buys it. I totally understand that as a wine lover myself.\u201d<\/p>\n
But he said investors can have it both ways. And a sound investment can help clients pay for the expensive wine they consume. (Investors drink about 20% of all bottles managed by Cult Wines Canada, Tiwari said.)<\/p>\n
Advisor access:<\/h3>\n
Cult Wines has worked with advisors in the U.K. and the U.S. to host seminars introducing clients to the asset class, something Tiwari intends to do in Canada. \u201cAdvisors see it as a way of deepening relationships,\u201d he said.<\/p>\n
What: Litigation finance<\/h3>\n
Investors fund the legal costs for commercial litigation cases in exchange for a share of the payout when a case is won or settled. Toronto-based Bridgeport Asset Management manages the Balmoral Wood Commercial Advocate Fund I LP, which closed to investors in 2018. Bridgeport will launch a second closed-end fund this year.<\/p>\n
Minimum investment:<\/b> US$250,000<\/p>\n
Assets:<\/b> About $40 million in the first fund, with about 350 legal cases under management; Bridgeport is targeting a larger investment for the second fund<\/p>\n
Expected returns:<\/b>The first fund is targeting gross returns of around 20% to 30% annually, said Bridgeport president John Fisher, who manages the Balmoral fund with principal and partner David Sedgwick<\/p>\n
Recommended allocation:<\/b> Around 3% of a portfolio<\/p>\n
Who it\u2019s for:<\/b> HNW clients, family offices and institutions<\/p>\n
Fees:<\/b> 1% management fee with 10% carried interest at a 7% hurdle<\/p>\nHow it works:<\/h3>\n
The closed-end fund is allocated to six litigation finance portfolios. Investors commit capital to the fund and the underlying managers select commercial litigation cases to finance. Investors receive the proceeds over several years until the fund winds up.<\/p>\n
The managers take two to three years to choose cases, and another year or two may pass before the fund is fully invested. The average case takes two and a half years to resolve. Investors get \u201ca good chunk of profits\u201d in the first four to six years, Fisher said, but distributions can take longer for cases that go to trial. There\u2019s also a secondary market where the fund can re-sell cases to liquidate before the settlement.<\/p>\n
Benefits and risks:<\/h3>\n
Court cases are less correlated to the stock market and macroeconomic conditions, Fisher said. While other alternatives, such as private debt, can suffer in a poor economy, a litigation portfolio will be less affected \u201cunless it\u2019s complete Armageddon\u201d and the courts stop functioning, he said. The early part of the pandemic, for example, led to cases against insurers that denied coverage. In recessions, plaintiffs may depend more on outside financial help.<\/p>\n
Court cases can have a binary outcome: if a plaintiff is unsuccessful, investors could lose all their money invested in that case. The legal process can also be slow, making litigation finance less liquid than other alternatives. \u201cIt takes time for the money to come back,\u201d Fisher said.<\/p>\n
The fund is diverse geographically and in the type of case (e.g., intellectual property) to limit risk from regulatory changes. Diversification also extends to the plaintiffs\u2019 industries, the law firms managing the cases and the stage of litigation: managers fund some cases when a claim is launched and others beginning at the appeal stage.<\/p>\n
Objections to financialization?<\/h3>\n
Some potential investors aren\u2019t interested in the fund because there\u2019s already too much litigation in the world. Fisher called that \u201ca very simplistic view.\u201d<\/p>\n
People or small companies may lack the funds to go up against large multinationals even when their case is strong. Financing cases lets large companies know plaintiffs won\u2019t be bullied, he said, and can lead to settlements.<\/p>\n
\u201cThere\u2019s only justice through the legal system if you have the financial resources to pursue justice,\u201d he said. And the fund doesn\u2019t finance suits without legal merit because they probably aren\u2019t going to win.<\/p>\n
Advisor access:<\/h4>\n
IIROC advisors with HNW clients invested in the first fund, Fisher said.<\/p>\n
What: Music streaming royalties<\/b><\/h2>\n
Portfolio managers buy the rights to songs and collect royalties when they\u2019re played. The ICM Crescendo Music Royalty Fund, managed by David Vankka, partner and managing director with Calgary-based ICM Asset Management, launched last year.<\/p>\n
Who it\u2019s for:<\/b> Mass affluent or HNW investors; music fans<\/p>\n
Minimum investment:<\/b> $10,000<\/p>\n
Fee:<\/b> 1.4%\u20131.9% management fee depending on unit class; 5% carried interest<\/p>\n
Assets:<\/b> $20 million; approximately 400 songs under management<\/p>\n
Recommended allocation:<\/b> Around 10% of a portfolio<\/p>\n
Expected returns:<\/b> Roughly 6.5% annual distribution on a monthly basis. Those distributions will either grow or the balance will be reinvested in the catalogue, Vankka said.<\/p>\nHow it works:<\/h3>\n
Portfolio managers buy rights to songs from an artist for a lump sum; whenever those songs are streamed or played on the radio or at a restaurant (or on platforms such as TikTok or Peloton), a centralized organization collects the royalties and distributes them to the song\u2019s owner.<\/p>\n
\u201cAll that goes into a pot and then comes back to our fund,\u201d Vankka said, generating predictable income for investors as well as capital appreciation.<\/p>\n
Streaming has made royalty revenue more predictable. Managers focus on data from streaming platforms like Spotify and Apple Music rather than trying to identify talent. They also consider factors such as whether the artist is touring or collaborating with other artists, and how an artist trends on social media \u2014 indicators that consumers may find the artist\u2019s back catalogue.<\/p>\n
It\u2019s easier to forecast how a 15-year-old catalogue will perform than one that\u2019s two years old, Vankka said.<\/p>\n
\u201cTypically, assets in the first couple of years will show a material decline, particularly if they\u2019ve been promoted or on the radio. But as they get older the tail gets flatter, so forecasting becomes more predictable.\u201d<\/p>\n
While some legendary artists\u2019 catalogues have sold for hundreds of millions, or more than 20 times cash flows, Vankka said ICM looks for catalogues that cost less than $6 million, or less than 10 times cash flows.<\/p>\n
Benefits and risks:<\/h3>\n
While other risk assets sold off early in the pandemic, few people ditched their music streaming services, Vankka said: \u201cThey\u2019re becoming more like consumer staples than consumer discretionary.\u201d<\/p>\n
Song rights are difficult assets to acquire. \u201cEvery counterparty is very different,\u201d Vankka said. \u201cThere isn\u2019t full transparency of information like you would see in the stock market,\u201d which he said can also create opportunities.<\/p>\n
Managers risk spending big on one artist whose star falls. Vankka said he looks for diversification across genres to account for shifting tastes, and also in the age of catalogues.<\/p>\n
And streaming itself could fall out of favour. If consumers go back to buying CDs and records, \u201cwhich I don\u2019t see happening, revenues would be down,\u201d he said.<\/p>\n
Rights also eventually expire \u2014 in Canada, 70 years after the artist dies.<\/p>\n
Objection to financialization:<\/h3>\n
Musicians face accusations of \u201cselling out\u201d when they sign with a major label or sell song rights for advertisements. Isn\u2019t selling to an investment fund just as lamentable?<\/p>\n
Not anymore, Vankka said. And everybody\u2019s doing it: Bob Dylan, Stevie Nicks, Rihanna. Cancelled tours deprived musicians of revenue, so selling catalogues can be an important income replacement. And there\u2019s an industry push to raise royalty rates on streaming sites, which would benefit investors.<\/p>\n
In January, the London Stock Exchange-listed Hipgnosis Songs Fund spent an estimated US$150 million on 50% of the rights to Neil Young\u2019s catalogue. \u201cNeil Young would have been the last guy on the planet to do this five years ago,\u201d Vankka said.<\/p>\n
Portfolio managers have to \u201croll up their sleeves\u201d to establish trust with musicians, who don\u2019t see their work as a financial asset, he said. And most investors consider music rights a fun asset to own.<\/p>\n
Advisor access:<\/h3>\n
The ICM fund is a Canadian mutual fund trust available through FundServ. A number of IIROC firms have clients invested, Vankka said, in addition to exempt-market firms and family offices.<\/p>\n
Editor\u2019s note: This article has been updated to state that the Balmoral fund is targeting gross returns of around 20% to 30% annually, as it\u2019s too early in the fund\u2019s life to measure returns.<\/i><\/p>\n
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This article was written by <\/i><\/mark><\/i> and was first published on October 4, 2021 in Advisor\u2019s Edge<\/i><\/p><\/p>\n","protected":false},"excerpt":{"rendered":" Three ways to diversify portfolios for wealthy clients Clients don\u2019t often complain when stocks go up. But…<\/p>\n","protected":false},"author":1,"featured_media":2847,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[22],"tags":[],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.iafp.ca\/planners\/wp-json\/wp\/v2\/posts\/2846"}],"collection":[{"href":"https:\/\/www.iafp.ca\/planners\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.iafp.ca\/planners\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.iafp.ca\/planners\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.iafp.ca\/planners\/wp-json\/wp\/v2\/comments?post=2846"}],"version-history":[{"count":0,"href":"https:\/\/www.iafp.ca\/planners\/wp-json\/wp\/v2\/posts\/2846\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.iafp.ca\/planners\/wp-json\/wp\/v2\/media\/2847"}],"wp:attachment":[{"href":"https:\/\/www.iafp.ca\/planners\/wp-json\/wp\/v2\/media?parent=2846"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.iafp.ca\/planners\/wp-json\/wp\/v2\/categories?post=2846"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.iafp.ca\/planners\/wp-json\/wp\/v2\/tags?post=2846"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}