If you are a long-term client of CH you are familiar with our investment “wheel”, the pie-shaped chart that shows the various components of your portfolio. One of the slices of that pie is labelled “Alternative”. So, what does this mean?
For us at CH an alternative strategy should meet three key tests:
- The fund managers are not required to own assets in any specific industry, country or security type. They can also own other non-traditional assets not typically held by more traditional mutual funds (ETFs, private equity and debt, options and derivatives).
- The fund should offer less downside risk, and upside capture of the market. In other words, it will have lower volatility than the overall market. When times are good it should go up less, and when times are bad it should go down less.
- The fund will generate a consistent internal rate of return or cash flow. The total amount of dividends, interest, and rental income are expected to remain consistent over time regardless of the price of the fund units. Currently, we have set this target at between 4 – 6% of the value of the fund.
Looking at the Dynamic Alternative Yield Fund
So how does the Dynamic Alternative Yield fund achieve these three goals for our clients?
First, they write options on many of the securities that they hold. Think of these as portfolio insurance contracts that make money for the fund holders when the contracts are sold, and that serve to set an upper and lower limit on the price of those securities.
Second, Dynamic invests in private equity and debt deals that are not normally available to the trading public. The fund is capped at no more than 10% of its assets being in this space as these assets are less liquid than normal stocks and bonds. At the same time, they typically offer better dividend and interest income potential making them appealing to institutional investors.
Third, the Dynamic team ensures that their mix of assets is always governed by the need to generate cash flow. This is the “Yield” part of the Dynamic Alternative Yield fund name. At any given time, the fund is expected to yield between 5-7%. This yield helps to cushion the volatility within the fund.
As a final point, it is obviously difficult to use a benchmark for alternative strategies since there are so many potential types of strategies. Based on discussions with our managers, our team uses a fixed targeted range of between 5-7% over rolling 5 to 10-year time horizons. How has Dynamic done against this target?
The fund was started on September 30, 2011 and as of June 30, 2020 (8.8 years) it has generated a compounded annual return of 5.72%.
Brian Trafford, Chief Investment Officer
& Your CH Financial Team