Athas Kouvaras, client relationship manager with Richter Family Office in Toronto, said many investors learned about true diversification this year when their entire portfolio was battered by rising interest rates.
“If any one thing can happen that can dissipate the majority of your portfolio, by definition you’re not diversified,” he said on one of the event’s panels. Markets showed the importance of having components in a portfolio that have nothing to do with GDP and rates, he added.
But this year also brought scrutiny to private investments. Panelists at the conference didn’t name Bridging Finance Inc., the private credit manager under receivership and facing fraud allegations from the Ontario Securities Commission, but the taint was alluded to obliquely throughout the afternoon.
Kouvaras said advisors need to do proper due diligence before investing in a new relationship. That may mean missing out on the next fund offering, but skipping basic steps can be costly.
Due diligence means conducting research on the firm, the strategy and the individuals managing the firm and the funds.
“If all the information is coming to you from the person you’re investing with, how do you know it’s true? Trust them but verify,” he said.
That includes audit reports provided by an asset manager. Even if the reports appear to be from a big-four accounting firm, you should call the accounting firm to check, he said.
Kouvaras said his firm has hired private investigators to help with due diligence: “You’d be surprised what they uncover sometimes.” For example, there have been cases where managers have lied about their education or where they’ve worked, he said.
“There were early signs, and a lot of them were discovered through those basic checks,” he said. “Did you go to Harvard? A person told us they did. They did not. It turned out to be a fraud. That’s one telltale sign.”
Loren Francis, vice-president and principal with HighView Financial in Oakville, Ont., said clients are reading about alternative investments in the news and asking how to avoid those mistakes.
“We can debunk that higher-risk claim by constantly educating our clients,” she said, speaking on a separate panel at the same event.
This means explaining redemption schedules, how fees are structured, and making sure the underlying investments are transparent enough to understand.
Tamara Forbes, vice-president, client team with Waratah Capital Advisors in Toronto, said advisors should examine the managers, the strategy, the fund’s liquidity and risk metrics as part of due diligence.
“Return is one thing,” she said. “How you got to those returns is very much another.”
Advisors need to examine how a fund is performing relative to how the manager said it would in a given market, she said. For example, if it claimed to offer investors a smoother ride, has that been the case this year?
Jason Brooks, president and portfolio manager with Invico Capital in Calgary, said disclosure and transparency have been a weakness for some private debt funds.
Managers should be able to tell you what percentage of a portfolio is impaired, he said, and show you bank statements confirming that payments are being made.
“If you don’t get clear answers then you’re not in the right place,” he said.
He believes private credit is a growing space, with banks shifting their focus toward wealth management and away from studying complex corporate credit.
“There’s easier ways for them to make money,” he said.