The idea of adding alternative investments to complement the more traditional asset classes in an investor’s portfolio is a time-tested one.
John Wilson is a founding principal, Co-CEO and Managing Partner of Ninepoint Partners. John oversees all aspects of the firm’s investment and research initiatives. Prior to Ninepoint’s formation, he was CEO, CO-CIO and Senior Portfolio Manager at Sprott Asset Management (SAM). Previous to SAM, he was Chief Investment Officer at Cumberland Private Wealth Management, founder and CEO of DDX Capital Partners, an alternative investment management firm; was Managing Director at RBC Capital Markets, a Director at UBS Canada; and previously, held a variety of management roles with Nortel Networks.
Michael Hainsworth spent 18 years at Canada’s Business News Network as a Senior Anchor. He is the Executive Producer and Editor in Chief of Futurithmic, a documentary series and publication about the impact technology today will have on society in the future. He is also the co-host of one of Canada’s most popular podcasts, Geeks & Beats, with radio legend Alan Cross.
Episode Transcript: The Fear of Running Out of Money
This is the Alt Thinking podcast by Ninepoint Partners.
Generally people are worried because they think there’s no answer and they’re not going to make it, and there is an answer. It’s not the answer you grew up with, it’s not the one you always thought you were going to get when you got to this stage. But if your plan was that I’m going to save up this nest egg, and as I get towards retirement, I want to keep it safe, so I’m going to plunk it in bonds and earn seven, eight, nine percent. And then I can do my little math and look at how much income that generates and I can live off of that. Well, that’s just not happening like it’s … it was a nice thought, and I understand why you might’ve thought that was going to happen ten years ago, or 15 years ago even, but that’s not happening, and it’s not going to happen.
The Alt Thinking Podcast from Ninepoint Partners begins now! Here is Michael Hainsworth.
Michael Hainsworth (00:43):
If you speak to an investor who retired immediately before the Great Financial Crisis, the first thing they might tell you is that the retirement lifestyle they had banked on through decades of saving and investing evaporated almost overnight. Portfolio losses hurt in the accumulation phase when you are contributing funds, but they are downright deadly when you are withdrawing. The 60/40 split of equities to bonds simply doesn’t work anymore. And Ninepoint’s John Wilson says that contributes to the fear of running out of money.
John Wilson (00:48):
The fear of running out of money has been with humanity really from the stone ages. Or from the creation of money anyway. From once we got to an economic system where you had a means of exchange to buy things, humans have been forced to think about, well, as I get older, and I’m less productive, and I’m not working as much, how do I support myself? And for a long time, the way they supported themselves was by having lots of kids. And they would live with their kids and their kids would support them as they got older, but certainly in modern times, as the workforce has become more mobile and people move to different cities to take on jobs, that has become less and less of a thing. So, over the course of basically the last century in our economy, as people age they have adopted this mindset of retirement and saving funds for retirement to fund, not just survival over that period, but a lifestyle that they want to keep in place, the one that they’ve built up over their working career.
John Wilson (01:51):
I’m 56 now, so I can tell from my own personal experience that for most of my … the early part of my working career I really didn’t think about retirement. I mean, people talk about saving, but you’re having kids, you’re buying a house, you’re hoping to have trips or to take vacations, and yes, you’re saving, but retirement doesn’t really feel that real. Once you turn, I would say for me, it was in my late 40s, but certainly when I turned 50, retirement and this whole idea that I’m not going to work forever, and that that point is coming, that felt a lot more real, and I think that’s true for most people.
John Wilson (02:26):
And so that calculus starts to be almost a constant equation that’s running through people’s heads, well, what am I really doing here? What are my expenses looking like? How am I going to make… what are my savings going to look like? So, it’s a very natural human experience that I think virtually everyone, maybe with the exception of people like Jeff Bezos, who obviously doesn’t have to worry about having money for the rest of his life, but for virtually the rest of us, I think is quite common.
Michael Hainsworth (02:51):
Okay, so then I guess it’s not the age that explains why my hair is going gray, it’s the worry about whether or not I’m going to have the cash by the time I hit that age 65.
John Wilson (03:01):
If you think of that fable growing up the ant and the grasshopper, and the ant busy working away and saving for the winter, and the grasshopper out playing and not saving any food for the winter. I think most people are really ants. They are quite conscious about trying to save. So, I’m not saying that people are overly worried about it, but they are thinking about it, and they are… That is the worst case scenario. Nobody wants to put themselves in a position where realistically, it looks like they might not have the funds to support themselves through the next, say, 30 years of their life, because people are living longer. So, that calculus gets more difficult, and that’s all been exacerbated by the environment that we’re in right now.
Michael Hainsworth (03:43):
Well the calculus gets infinitely more difficult when you realize that everything you were taught growing up about investing for your retirement, today, simply doesn’t work. The 60/40 split is just something that simply doesn’t work anymore.
John Wilson (03:58):
The idea of 60/40, being that of course, 60% of your assets are deployed for longterm growth in equities and to manage the volatility and to offset drawdowns and equities. When they have that once every seven, eight year drawdown, you own bonds, which historically when there’s an economic problem and stocks do poorly, interest rates fall even further, which supports the price of your bonds, bond prices go up when interest rates go down. So it’s been fascinating, even in the last decade, because of course, we went to 0% interest rates from almost 20% in the early eighties.
Michael Hainsworth (04:34):
John Wilson (04:35):
With a jagged line up and down, but a pretty steady trend all the way down to zero by the end of the financial or the middle of the financial crisis in 2009. That was really when the 60/40 portfolio started to look a little more impaired. I mean, it was a really nice mix. And in a way, if you think about it, a 60/40 portfolio was really a hedge fund. They didn’t call it that. But a hedge fund is designed to own one asset, which in this case would be equities, and then hedge your risk by owning a second asset that goes up in value, when the first asset goes down and that is a 60/40 bond equity portfolio. And the wonderful thing about the 60/40 portfolio was not only did bonds do well when equities did poorly, but for most of that time, they paid you pretty well.
John Wilson (05:20):
Even when equities are doing well. A decade ago you were still clipping five, six, seven percent on a corporate bond and even three or four percent on a government bond. Today, ten years into this zero rate environment, a government bond, a ten year Canada bond is paying you half a percent. Half a percent.
John Wilson (05:40):
So if you think, and that’s before you pay taxes on whatever you make on that bond, that’s before you pay any costs that you have. Whether it’s your advisor or a fund or whatever, and that’s before you even take into account inflation. And inflation has been low for a long time, but it’s still real. It’s still positive number. And so you take all those things away and you’re effectively, well, you’re losing money on that investment, that part of your investment. And the only way you can make money on that investment is if you think rates go even lower. And I’m not by any means saying this isn’t impossible, but you really need to go to become Japan or Europe where our rates go negative to meaningfully look at making a substantial amount of money on a government bond. So, yeah, it’s an extraordinarily difficult time to be putting bonds just straight… Owning bonds and using that as a diversifier For your equity risk.
Michael Hainsworth (06:34):
You say we’re ten years into the zero rate environment, but you’ve also predicted that we’ll be near zero on interest rates for the rest of your life.
John Wilson (06:42):
Yeah, well, and that’s assuming, I’m hoping I live a long time and I’m still comfortable making that assessment. I’ll start with ten years ago, when we started saying that, there was, I’d say quite a bit of pushback on that idea, that sounded sensational. And people thought, well, this is… It was a bad recession. So it may take a while, but eventually there’ll be raising rates again. And I think people do normalize their history. So people, to your point earlier grew up with rates that were higher, and grew up earning interest on the cash they had in the bank, and grew up when they lent money, it was going to be five, six, seven, eight percent. That was for most of our lifetimes. It’s quite normal for people to imagine, obviously that’s normal.
John Wilson (07:24):
So eventually we’ll get back to normal. And my point was, what has been normal is every time we have an economic event, a recession or a crisis or whatever it may be, the response function of the central banks, the orthodoxy has been well, we cut interest rates. And the question everyone has to ask yourself is well, why would you do that?
John Wilson (07:46):
And the answer is, well, they do that. Their logic is well, we’ll cut interest rates that keeps people from defaulting because they can carry the debt they have, but it also should stimulate new borrowing, which should drive growth in housing and business borrowing, all those sorts of things. So they do that and it generates more debt borrowing. And we go on to our next expansion. And then when we hit the next recession, because they wait a long time after the recession, they’re so careful not to try and raise rates too early, for fear of causing a double dip recession, that by the time we get to the next recession, rates aren’t back to where they were before the last one. So now we’re at a lower level. We get another recession, they do it all over again. And so you keep going down that ladder and we’ve been doing that for decades.
John Wilson (08:28):
And every time we go down and come out of it, we have a bigger amount of debt, outstanding at a lower rate of interest. And it makes it harder to raise rates. Because now we have so much debt outstanding that interest costs rise quickly as you raise rates. So you have to be very careful and they don’t don’t raise rates very much. And then we get a next recession, and they go down again.
John Wilson (08:47):
So one, that’s been the orthodoxy and I don’t see anything that’s going to change that pattern. And that’s probably the best case for why eventually when we get through this COVID recession, and get into our next expansion and get whenever that next recession after this comes, we may end up negative. I don’t think that’s out of the box at all, but the other big reason now, and it’s been exacerbated by the COVID response. And I’m not saying at all, that we shouldn’t have done what we’ve done. I actually think we had no choice. Every government needed to do the sort of fiscal stimulus that they’ve done in massive quantities, because we all saw the horrific unemployment numbers coming as we virtually shut down the entire economy. So we had to do it, but now that we’ve done it, we’ve created an enormous amount of government debt on top of already high levels.
John Wilson (09:39):
And so that is going to force rates to stay low for a long time, simply because governments can’t afford higher interest rates. Effectively, and most of the large central banks now, including the Bank of Canada, separate from keeping rates really low, they were also buying in that corporate or that government debt, sorry, with effectively printed money, created money. So this isn’t a two year thing or a five year thing, or a ten year thing. The numbers are so large, this is decades and decades.
Michael Hainsworth (10:08):
So if we are in a low yield and a low growth world for this foreseeable future, where do alternative assets come in?
John Wilson (10:15):
This has been our point really for our entire existence. People need to think broader and more creatively than what they have been doing. And that actually is the Genesis of our name. So nine point is a IQ test that people do where the solution is to think outside the box. And that’s our culture and our core value is that we are always looking for creative ways to drive better solutions for people. If you go back to ten years ago, when rates first went to zero and people were struggling with how much return they could earn on the 40% of their portfolio in bonds, what you’ve seen is people saying, “Well, I guess I’m going to own fewer bonds, and I’m going to own more equities, because at least I can get dividends and equities, and I can get, over time, generally equities do pretty well.”
John Wilson (10:58):
And certainly they were cheap in 2009 after the crisis. So people started rolling more and more into equities. And that’s been one of the biggest reasons why the equity market has had such a terrific run. Long run rates of return over the last a hundred years are around 8% in the equity market. The last decade is almost 14%. And so that reaction function of saying, “Oh, it’s harder to own bonds. I’m going to own more equities.” Has pushed the equity market up.
John Wilson (11:24):
Now, if you look at where you are, now that idea that instead of 60/40, and you see regularly in publications where a traditional asset managers say, “Well, it’s harder to do now, the return is looking forward here because the equity market is quite expensive. And the bond yields are obviously very, very low.” They’re well known market prognosticators. That sort of say, well, the next decade, given where we are, you probably only on that balanced portfolio, you might make two or three percent a year. Well net of fees and costs and taxes and inflation, that’s not much at all, if anything.
John Wilson (11:59):
So their recommendation, their big idea is you should go to 70% equities and 30% bonds. And we just think there’s a way better answer than that. We don’t tell people you shouldn’t have equities and bonds. You should. Equities generally over long periods of time have done very, very well. Bonds if I believe in what I believe that bonds yields can go lower than you should still have some bonds, but there are other asset classes you can own that diversify your risk, and add better return streams into your overall portfolio mix. And for Canadians, what they should understand is every Canadian has access to the CPP. Look at teachers. Teachers are regular people doing great jobs, productive members of society. Their pension fund is the same as CPP. They’re heavily invested in assets that are alternatives to equities and bonds. And they’re in equities and bonds, but up to half or more of their investment funds are in alternative assets.
John Wilson (12:59):
And those are things that don’t go up and down when equities and bonds go up and down, that gives you your risk diversification. And those are opportunities they have a where they trade off, maybe less liquidity. In other words, your money has to be locked up a little bit longer, but they get a much better return stream in exchange.
John Wilson (13:16):
And given where return streams are in bonds. And now given the future outlook for equities, given how well they’ve done over the last decade, that looks really attractive. And so that’s where we focus. We think we can help people introduce those types of strategies to their portfolio mix, which today in Canada is extraordinarily low. It’s not unusual for people to have zero alternative assets, just to be bonds and equities. But we think it’s not outrageous to see that number go to 10 or even 20% of people’s portfolios given what the environment looks like.
Michael Hainsworth (13:49):
I wonder if it’s actually substantially higher than that, because anyone who owns a home technically don’t they own an alternative asset class?
John Wilson (13:57):
Well, you’re exactly right. I mean an alternative asset class, if you think of a home, it’s for most people, it’s their largest single investment. It is an asset clearly, you own it. That value of that asset almost universally has gone up pretty steadily over time and over a meaningful period of time, it’s gone up a lot. And the value of that home is not closely aligned with what’s happening to your stock portfolio or your bond portfolio. And similar to what I mentioned earlier, it’s not very liquid. Tomorrow, if I decide I need some money, I’m just going to sell my home and get some money. You don’t work it that way.
John Wilson (14:31):
So people have a long time horizon on owning their home and they understand the benefits of owning that home over a long time horizon. You don’t need that same time horizon for a lot of alternative asset classes, certainly real estate being one where your time horizons are a little longer, but we have strategies that a wide range of things that diversify people’s risks. We have private lending strategies that effectively your capital is linked to a credit lending team that lends to businesses. Those loans, depending on the strategy could be relatively short term, to finance things like trade receivables.
John Wilson (15:08):
They can be a little longer term, or asset backed lending, or those types of strategies. So there’s a wide variety of ways that you can earn returns in the sort of high single digits. Again, very uncorrelated to what’s happening in equity and bond markets, but starting to get those types of returns that you really need to try and grow your capital. But there’s other things gold, has sort of sneakily come back. It’s almost at $2,000 again. That is an alternative asset class.
Michael Hainsworth (15:33):
You’re talking about owning physical gold, right? As oppose to a futures paper?
John Wilson (15:38):
We have funds that invest in minors of gold, who obviously do much better when the price of gold goes higher. So either way, but you’re right. Owning gold bullion, which we also do is an attractive way for people to get diversification. But again, the knock on gold historically has been, it doesn’t pay you any yield. Well, net of inflation, guess what? Neither do bonds. So gold is looking much more attractive, especially in an environment where central banks are printing a lot of money and government’s deficits are rising sharply. So that’s just another way to diversify.
John Wilson (16:14):
So once you get into… You open your mind and get outside the box and start thinking of other ways I can diversify my risk and add return. There’s a multitude of choices. Everyone’s different clearly in terms of what their risk tolerance is, and what they’re looking for. But to your earlier point about owning a home, people do this already without even understanding what they were doing.
Michael Hainsworth (16:36):
Well, few portfolios are 100% alternative assets. How do you determine the appropriate weight?
John Wilson (16:41):
We work with both institutions and advisors. And advisors are becoming exceptionally well-educated on the alternative asset class. They have started to figure out the exact same thing we’re talking about. Their role, and we think the rise over the last few years of robo advising, and this idea that I could just log on a computer and a computer is going to tell me classically, I’m going to put you in a 60/40 portfolio, or maybe a 70/30. Those types of technologies, we think are much more challenged in a world where you need more sophisticated advice on things like, well, how do I find different strategies in the alternative asset class? That you really need an advisor for. And advisors are really coming up the curve quickly in terms of understanding what those opportunities are for their clients.
John Wilson (17:31):
And they know their clients individually, the best. We see situations where people might do five or ten percent alternatives. Other situations where people are going 40 or 50% alternatives. Usually the biggest consideration is access to the funds. So there’s a classic sort of mentality that everybody likes to have all their money available for them on a single day’s notice kind of thing, like stocks. The reality is, if you’re really saving for retirement or you’re saving for the rest of your life, do you really need all your money on one day notice? What if it was 30 days notice? Could you have a third of your money tied up for 30 days? I think you could.
John Wilson (18:11):
So that math is what advisors are really good at. They’re really good at understanding their clients, knowing their clients, helping them work through some of the anxieties they might have about their future and when do they need money and help them plan that out. And so we really rely on the advisors to do that. And our role is to make sure they and their client are really educated on what these strategies can do for them. What some of the puts and takes are of being in these strategies. And how do you mix them together to optimally drive the kind of performance and risk profile that they’re looking for?
Michael Hainsworth (18:46):
You mentioned owning a home as an alternative asset class is largely illiquid, and the anxieties that advisor clients have about liquidity. What about the liquidity of alternative assets?
John Wilson (18:56):
So there’s always trade offs. So gold does, we would argue well, and has been doing well in an environment where governments are running large deficits, printing money, and bond yields are extraordinarily low. So those are the good things. The other good thing is it tends to be fairly uncorrelated to what’s happening in equities and bonds. So that’s also good. The downside is that it’s very volatile. The gold price moves around a lot. And so that adds… If you just own gold, you’re going to have a lot of volatility. If you put it in a portfolio with a bunch of other things, that volatility gets mixed up with everyone else because it’s uncorrelated and you don’t really notice it nearly as much.
John Wilson (19:38):
But gold is liquid. You can trade it daily it’s fine. You go from there, we have other strategies, alternatives don’t have to be illiquid. We have strategies that are in the FX Market. For instance, we have a team out of Boston, been doing this for almost 20 years, highly proficient using computer models, trading for an exchange, one currency against another. That strategy is also very liquid. The currency market’s actually the biggest market in the world. It’s daily liquidity, but it has no correlation to equities or bonds.
John Wilson (20:11):
So again, there’s another way you can be in an asset class in a strategy that is driving a return stream, very similar to equities, but has no correlation to where an equities go up or down. So those are more liquid types of examples. I mentioned the private lending one earlier. That tends to be less liquid because when you lend a company money, you don’t… If you change your mind, you can’t get your money back the next day. So there’s ways to manage the liquidity in those types of strategies. We run a multi-strategy fund that has client capital deployed across a variety strategies, from very liquid to less liquid. So that there’s always a liquid pool available for people who want to take some money out.
John Wilson (20:54):
That’s an example of a sort of, I’ll call it medium liquidity. And then if you’re in the business of lending people, let’s just say, you’re going to get into the real estate development business. You’re going to buy land, build buildings, eventually sell the units or whatever. That’s a much longer profile. And that would be a very, I’ll call it illiquid type of thing. Where you might be locked up for a period of years to see your outcome, your output. So it varies, but generally speaking, I think it’s fair to say on average, in alternatives they don’t trade on public markets. Most of the strategies.
John Wilson (21:30):
So there is not that sort of daily access. I’m going to push a button and get all my money back out again. But to my longer term point, if you’re really thinking longer term, having money tied up for a month or a quarter, if you want your money back, it shouldn’t be such a big deal.
Michael Hainsworth (21:47):
It’s often said that out of every crisis comes opportunity. Where are you seeing the greatest opportunity?
John Wilson (21:52):
Oh, that’s such a great question, Michael, I’m an optimist at heart. And so COVID, as horrible as it’s been, one of the great things is I can’t think of a time when almost the entire planet was unified in a search for something like a vaccine and therapies to treat COVID. We will resolve COVID. We will come up with vaccines and therapies that will help treat the disease. So not only if you get it, will your treatment have better outcomes and faster outcomes, but eventually we’ll get people vaccinated. So it’s not even really a thing. It will become the smallpox of this century. What opportunity does that create? I think we’ll get back to a world where the economy gets back on an even footing. Ultimately we’ll be growing again. Maybe not as fast as we were a few decades ago, we can grow again.
John Wilson (22:48):
As to my earlier point. I don’t think rates will go much higher if at all, over that period. So in an environment where the economy is doing well, and businesses are healthy, and want to grow, and rates are very low. Some of our strategies like the private lending strategies, are going to be highly attractive. And they have been attractive over the last decade, but I think they are even going to be more so in that type of world. Strategies that can earn you six, seven, eight percent, or sometimes even a bit better, are going to be highly sought after in a world where rates stay low and risk looks pretty low because the economy is growing again. so I do look through this covert period, and think that’s going to be a big opportunity.
John Wilson (23:37):
I do think realistically, people are a little too optimistic on how fast we’re going to get there. It’s already a massive achievement to think of getting a vaccine done in a year. Normally that would take several years. But then, this virus is global in nature, there’s literally billions of people that need the vaccine. The whole idea of scaling up the production of the vaccine and the distribution, and trying to get everyone inoculated, and people who say they don’t want to take vaccines. I mean, that whole process is going to take a while.
John Wilson (24:07):
So if I look through that, one alternative assets have helped shelter peoples returns. That asset class has done extraordinarily well through this period. I think there’s still some risk in the equity market because I don’t think we’re coming through COVID quite as fast as equity market has priced in. So I think the alternative asset class will help protect people through that. But ironically, even when we’re through it, I think it’s one of the ones that will do best.
Michael Hainsworth (24:30):
Your mother picks up the phone, calls you, she’s worried, nervous about her retirement future. What do you say to your mom to ease that concern, or to anybody’s mom?
John Wilson (24:43):
Generally Are worried because they think there’s no answer and they’re not going to make it. And there is an answer. It’s not the answer you grew up with. It’s not the one you always thought you were going to get when you got to this stage. But if your plan was that I’m going to save up this nest egg. And as I get towards retirement, I want to keep it safe. So I’m going to plunk it in bonds, and earn seven, eight, nice percent. And then I could do my little math and look at how much income that generates and I can live off of that. Well, that’s just not happening. It was a nice thought. And I understand why you might’ve thought that was going to happen ten years ago or 15 years ago, even. But that’s not happening and it’s not going to happen. So that’s bad. And that’s why you’re feeling this anxious feeling about it.
John Wilson (25:26):
But there are answers and they’re not the ones you grew up with. And this alternative asset class just takes a little bit of education and learning for people to understand what’s there. But once they get there, they get very comfortable with it. And to your point, part of it is the fact that they realized, well, I do this, or I own a house.
John Wilson (25:45):
That’s a good asset class. Oh, banks make a lot of money. They lend money to businesses. And these guys actually do more work than the bank does when they lend money. So they’re very careful about making sure they get their money back. So I understand that business. Why can’t I be like that? We understand the worry and we understand the dilemma for people, but that’s because they’re thinking inside the box. Still, a lot of people in our industry who are set up to sell equities and bonds all the time, they’re going to keep you in that box. But if you look outside the box, there’s lots of answers and they can be customized for almost anybody.
John Wilson is the founding principal, co-CEO, and Managing Partner of Ninepoint Partners.
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