Hi everyone and thank you for joining us today. We wanted to dedicate some time at this year's seminar to alternative investments, just given how important they’ve become in the context of institutional portfolios.

And, in fact, oftentimes, when we meet with clients, we provide our views not just on public markets, but also private markets and alternative investments more broadly. And so that's exactly what we're going to talk about today. We'll start with a review of how allocations to our alternative investments have evolved over time, how they perform relative to expectations, we’ll then share our views on select alternative asset classes. And finally, highlight some of the opportunities that we're seeing in liquid alternatives as well.

As a preview, we do believe alternative investments will continue to play an important role in institutional portfolios, but with some important considerations that we're going to share with you today. With that, let's get started with that first agenda item and look at how allocations to alternative investments have evolved over time.

Now this chart shows you the aggregate asset mix across Canadian institutional investors. It's how it's changed over the last 20 years. And it's pretty remarkable to see how much allocations to alternatives have increased over that time, from about 10% in 2005 to 40% plus today. Now, it's important to acknowledge that these numbers are skewed higher, by some of the largest Canadian pension plans that tend to have significant investments in alternatives.

But still, the overall trend is the same. Now, what makes up this allocation? It's predominantly private markets, real estate, infrastructure, private equity and private debt. You can see here allocations to hedge funds, illiquid alternatives, are quite modest. And it's something that we're going to talk about later in the presentation as we do think these types of strategies have a larger role to play going forward.

But I think for now, in institutional context, it's fair to say that alternative investments have pretty much become synonymous with private markets. Now, why have we seen such a significant increase over the years? We think it's because of this combination of generally favourable investment characteristics associated with private markets and some of the challenges that investors has been dealing with for the better part of last 15 years.

Generally speaking, private market investments promise attractive, consistent and uncorrelated returns, access to new opportunities, as well as ability to earn additional compensation for giving up some of the liquidity. And this is at a time where many investors have looked to either increase the return profile of their portfolios in the low yield environment or just in general improve overall diversification.

Just to illustrate what this looks like in the portfolio construction context, if we start with a 60/40 portfolio with 60% in equities and 40% in fixed income, if investors wanted to reduce risk in those portfolios, then allocating 30%, as an example, to alternative investments would be expected to shift or lower the risk profile of that portfolio while maintaining a similar return.

And for those investors that wanted to enhance returns, funding this allocation from fixed income would be expected to shift expected returns higher while maintaining a similar level of risk. Now, this is just a hypothetical example. We're going to look at what actually happened in practice. But let's first review how individual alternative strategies have done relative to expectations over the last 15 years.

The short stories have actually done quite well. On this chart, we show performance both in terms of annualized returns, those are the blue bars, as well as drawdown, which is represented by the yellow bars across different alternative asset classes as well as traditional asset classes, just outside of the shaded area. And you can see that at least when it comes to private market investments, returns have been competitive with equities.

And generally speaking, they also demonstrated better drawdown resilience. Now what's also important is that this investment experience has been delivered without significant correlation with traditional asset classes. And so this is really highlighting those diversification benefits you generally expect to get by investing in alternative investments. Now let's revisit that portfolio construction slide and see what impact allocation alternatives have had on returns in a broader portfolio context.

And here again, the actual experience has actually been better relative to expectations. So once again, we're showing the three portfolios that we started with. But here we're illustrating realized returns as well as realized maximum drawdown for all three. And if we start with a lower risk portfolio, you can see that not only was the risk reduced relative to traditional 60/40, but realized returns were actually a little bit better than you would have expected from the start.

And similarly for higher return portfolio, you can see that that objective was achieved while investors also enjoyed lower level of risk. You can see the exact numbers in the table that we included on this slide as well. But I think this slide really highlights how alternative investments have benefited portfolios over the many years, why we've seen such significant increase in allocations, and why we continue to see significant focus in this area.

Now, having said that, the experience in markets of the last couple of years also highlighted some of the more practical limitations associated with private market investments, in particular around liquidity. So, what happened? Well, in 2022, we saw a significant sell off in both equities and fixed income markets, and that pushed relative allocation to private markets higher, in some cases significantly higher, relative to target.

Of course, private market strategies are difficult to rebalance because of their illiquidity. This challenge was further compounded by the fact that in many cases, investors had to continue to allocate capital due to prior commitments they've made to private market investments. In addition, spike in interest rates and inflation create a lot of uncertainty so there was a significant decline in IPO activity and general reduction in transactions in private markets like private equity and real estate.

And what that meant was the distributions coming out of these strategies were significantly reduced, and in some cases investors had a difficult time withdrawing capital from the strategies altogether. While we do believe and you'll see this later in the presentation, that private market alternatives will continue to play an important role, we do think that sizing these allocations appropriately is very important, and really managing the liquidity risk associated with them.

We wanted to give you a couple of ideas for how you can approach this challenge. And of course, there are many different factors that go into it, including how does this align with your return objectives and governance burden, but we think the first two that we're highlighting on the left-hand side are especially important. The future expenditure objectives are about regular cash flows that you need to generate in the portfolio.

And liquidity needs may deal with, more irregular spending than you may be anticipating. And there is some formal analysis that you can do that brings these two variables together. And we just wanted to show you one example here on the right-hand side, that looks at how the probability of a liquidity event changes. And by liquidity event would be forced selling in the portfolio.

So how the probability of such an event changes depending on your annual spending rate and how much you have invested in private markets. This is just one example, but the key message that we want to leave you with here is that this is very investor specific. So understanding your liquidity needs and cash flow needs, as well as liquidity profile of your private market investments is very important to start quantifying the level of liquidity risk in the portfolio and managing it appropriately.

Okay. So far we have looked at prior performance and different alternative strategies and also highlighted the importance of managing liquidity risk. Let's now turn our attention to the future and talk about outlook. And we think a good place to start is by reviewing the set up in public markets. And here we do see some of the key areas that have less favourable outlook.

Starting with U.S. equities as an example, where valuations today are elevated relative to the 15-year average. And so here we'll look at P/E multiples. And also elevated relative or the higher end of the historical range. Now we did have some pullback in U.S. equities at the start of this year. But this problem hasn't been entirely resolved. And we're seeing a similar challenge playing out in corporate credit where currently spreads are very tight relative to history. And we've also seen correlations between these two asset classes on the rise over the last couple of years. And so, against this backdrop, we think private market investments will continue to play an important role of providing stability and diversification to portfolios. Now, turning to investment outlook, here we too are generally constructive with some important considerations.

In real estate, certainly this is an area that's been challenged over the last couple of years, but we're starting to see some of the headwinds subside, whether that's interest rates and inflation coming down, a little bit more visibility around office or just generally positive performance across core assets across different sectors within real estate.

Now, we do think that asset quality and valuations will continue to be important considerations going forward. In infrastructure, we continue to see significant demand for private capital and also growing investment opportunities. Now how you access those opportunities is also very important. We're going to talk about that in a minute. And finally, private debt emerging in the aftermath of the global financial crisis. This has really become a very mature and established asset class. An only word of caution here is around the amount of capital that's gone into the space that's now created more managers, more complexity, more competition for lending so over time, this could make certain segments of the private debt arena vulnerable to a turn, a negative turn, in the credit cycle.

We do think that's something that's very important for investors to understand with respect to the strategies that they're investing in, the underlying nature of the loans and protections that are in place. We're actually going to spend a little bit more time on private debt in our presentation on credit. But these are just some of the key areas that we wanted to highlight at this point.

With that, let's spend a little bit more time on real assets, and we'll start with real estate. And here we show different fundamental drivers or factors that are influencing performance across different sectors within real estate. And what's interesting is that while overall operating results for core, sohigh quality assets, across different sectors have actually been reasonably good, investment performance has been quite divergent.

For example, while residential and industrial sectors have done well due to strong demand,if you look at valuation on the right-hand side, and by valuation, we're showing it in the context of the difference between the cap rate and the ten-year Government of Canada bond yields. So that spread is represented by those blue bars. You can see valuations for those two sectors today of those spreads are quite a bit lower relative to history. And so, we do think this could be a potential headwind to performance going forward if we see some normalization that spreads widen back to historical levels.

On the other hand, sectors like retail and office have been relatively weak,  retail is actually done okay in the last couple of years, but it's still recovering from Covid, and offices there's still some uncertainty for what the future will look like. But if you look at the valuations on the right-hand side, you can see that those spreads are a lot closer to historical levels. So, the valuation risk in these sectors, in our view, is lower, and performance going forward will be much more influenced by fundamental performance.

Now, while we've seen this divergence in performance across sectors, there's also been a lot of divergence in performance within sectors. Probably no better example of this than office. This chart shows how the vacant office space in the United States is distributed across properties. And it will be a similar picture in Canada. But what you can see is that most of the total office vacancy is concentrated in the relatively small number of buildings.

Now, why is that? Tenants recognize weakness in office market, and they take advantage of opportunities to upgrade their space. And as a result, operating performance for high quality office buildings has actually been quite strong. And we expect that to continue. Now, we've also seen a significant drop off in office construction and so it is also possible, to the extent the main demand remains in place, that it trickles down into the next tier of office properties, potentially creating opportunities for investors in that area as well.

Overall, we are constructive on core high quality real estate. We believe it will continue to perform well, but it's also important to consider valuations. There are also potential for opportunities in some of the other sectors that perhaps have been a little bit out of favour over the last couple of years. Now, let's turn our attention to infrastructure and here toowe are generally positive and for a few reasons.

First, we like the attractive business characteristics associated with core infrastructure assets. These investments tend to be businesses that have a predictable and steady cash flows, good margins, and oftentimes operate in industries that have high barriers to entry. So, think about ports or toll roads. Notwithstanding these attractive characteristics, there is still significant need for capital in this area. And this chart will show this anticipated gap in terms of investment need versus what's expected to be provided.

That's measured in trillions of dollars. Now, this gap exists because government spending has been constrained due to deficit. At the same time, we need to upgrade our existing infrastructure, but also the need to invest in infrastructure to support some of the big trends that we're showing on the right-hand side around digitalization, decarbonization, deglobalization and demographics.

So, for example, with respect to deglobalization, to the extent that we see this trend to onshoring, they'll create significant demand for building our transportation infrastructure, whether it's railroads, ports and airports. The theme around digitalization, we are all using more data today and that's created significant demand for data centres. That's been only amplified by developments around artificial intelligence. Now, data centres can also be an example of an asset that can rise very quickly because of a lot of enthusiasm and excitement in one particular area. Now, it's also important to recognize there could be changes that upset that dynamic. For example, the big technology firms that have made significant investments in this area may revise their budgets lower. Although it could be technological innovation, or news like we saw with respect to DeepSeek, that also raised some question about how much infrastructure we're actually going to need.

Now, we do think that these are ultimately durable, long-term trends that should support performance of infrastructure assets for many years to come. But some caution is warranted when investing around this in demand segments. And certainly, it's important to own assets that have exposure to these themes, but also ensure that they continue to share the underlying business characteristics that we highlighted on the left-hand side, really associated with core infrastructure investments.

Let's take a minute and summarize what we reviewed so far with respect to outlook. We started with a recap of the backdrop and public markets and some of the challenges that we're seeing there. And we believe that in that context, private markets will continue to be a sort of source of stability and diversification. We then talked a little bit about outlook for select, private market strategies, including real estate and infrastructure that were generally positive, but with some important considerations for investors as well.

Earlier in the presentation, we also talked about the importance of managing liquidity risk and properly sizing these allocations. And so related to that, we think that more liquid alternatives can also play a complementary role. And that's what we want to talk about next.

You may recall that earlier in the presentation we highlighted how liquid alternatives or hedge funds represent a relatively small portion of portfolios today.

And there are a few reasons for that. Partly it's, just how well private markets have done in in addressing some of the key challenges. But there are also other reasons, such as, perhaps increased complexity associated with hedge funds, higher cost may have even been the prior investor experience. Now, having said that, we do think that carefully and thoughtfully constructed allocation to liquid alternative strategies can be complementary to both public markets and private market investments, and therefore they do deserve investor attention as well.

You may be wondering when we say hedge funds or liquid alternatives, what are we actually talking about? And it's kind of hard to provide a general definition. There are literally tens of thousands of funds and dozens of different strategies, but we wanted to share some of the common, factors or characteristics that these types of strategies tend to share.

And so, as the name suggests, liquid alternatives tend to invest in liquid securities so predominantly public markets. However, unlike traditional or long-only investments, hedge funds generally try to provide an absolute return as opposed to outperform a particular public market benchmark like S&P 500 or TSX, for example.

To do that, they have a lot more flexibility embedded in their mandates. They can use derivatives, leverage, as well as short selling,just to give you a couple of examples. And because they strive to provide this differentiated investment experience, they often charge performance fees.

On the left-hand side we show some of the common hedge fund strategies that you might come across. Now, one other important common characteristics across hedge fund strategies, in general, is that they are very much,or their performance is very much, driven by manager skill.

So oftentimes you can see quite a bit of dispersion in results even when looking within the same strategy. Having said that, let's take a look at how different liquid alternative strategies have done over the last five years and how they compare to public markets over that time. So, on the left-hand side, again, we're showing performance in terms of annualized returns for some of the common hedge fund strategies over the last five years, along with the worst drawdown that these strategies in aggregate experienced over that period of time. So those would be the yellow bars.

We also show public markets right outside of the shaded area. So, focusing on returns, you can see there are somewhere in between equities and fixed income and in general they’re then quite a bit better than fixed income markets over that period of time. And, of course, when it comes to risk, different strategies will have different risk profile, but generally speaking, they've exhibited better resilience relative to public markets and in some instances, significantly better resilience, as is the case with macro and equity market neutral strategies, as an example.

And again, importantly, this strategy of this performance was delivered without significant correlation with global equities and Canadian fixed income. And so, these are some of the the main reasons why we think that certain liquid alternative strategies can actually be quite complementary to both public and private markets without necessarily taking up a lot of the liquidity budget.

Now, if you were to allocate to liquid alternatives or hedge funds, how can you potentially approach this?

We think there's really two ways. With the strategic allocation, the goal here is to really complement existing portfolio investments to either improve or diversify sources of returns or help reduce risk or diversify risk in the portfolio.

Once the allocation is set, it tends to be static, so doesn't move too much. And we believe it's important to fulfill such an allocation taking a more diversified approach. You can do this by investing in a multi-strategy fund where manager selects specific hedge fund strategies. They're allocating capital to, or to the extent that the investor has the resources, they can do this themselves.

But the important part here is to be well diversified and to ensure that this allocation works well in aggregate with the other pieces within the portfolio. With a tactical approach, the goal is to take advantage of some perceived market opportunity, and so the size of the allocation can vary depending on the opportunities that investors may be seeing in the marketplace.

And it's the allocator or the investor that ultimately makes the decision around where, how, and how much to invest. And of course, the success of this approach will largely be dependent on the allocator skill in  doing this effectively. It's important to have that flexibility in the investment policy to do this as well.

So far we've talked about hedge funds, liquid alternative strategies at a fairly high level. But I wanted to give you a couple of examples of these strategies and explain how they may work in the current market environment. We'll start with global macro. So global macro strategies look to take advantage of some macro policy or other macro developments that influence performance across currencies, commodities, credit as well as interest rates.

Now we have seen quite a bit of volatility in these areas over the last couple of years, in particular around interest rates and it’s probably fair to say that we'll continue to see that going forward. And generally speaking, these are the types of conditions that create good opportunities for skilled macro managers to take advantage of.  

Market neutral strategies are a little bit different here. The focus is on building a portfolio of long positions and companies you expect to outperform, while also constructing a similarly sized short portfolio, companies you’re expecting to underperform. The overall portfolio is built in such a way that the performance is really driven by this relative difference in performance between long positions and short positions, while the broad market factors tend to be offsetting.

And so there is very little sensitivity to a broad equity market or fixed income market in that context and performance is driven primarily by relative performance of long versus short side of the portfolio. We think these types of strategies can do well. We see significant dislocations of volatility across different sectors where valuations may be high. And so really does provide opportunities for investors to take advantage of both positive views but also negative views.

And so again this is a type of strategy that we would expect to work well in the environment that we're in today. Finally, special situations, these strategies look to take advantage of opportunities where you can trade or acquire security on a significant discount because the company is going through some operational financial challenges with the expectation there will be a positive catalyst that will cause the security to reprice higher. Generally speaking, managers can work with other creditors or a company management team to create those positive catalysts. We've seen opportunities in this area in Europe as an example, and to the extent that we may go into a recession or a tougher economic environment, we think opportunities for these types of strategies will improve from here.

So this is not an exhaustive list, but just a couple of different strategies and illustrations of how they may work in the current environment. Earlier on, I mentioned that ultimate success across these and any other hedge fund strategies is very much dependent on manager skill, and therefore, manager due diligence and selection is very important. And so, we wanted to spend a minute and just to highlight some of the key areas for consideration.

As with any other investment, due diligence really starts with understanding of the investment strategy, the process, how the manager achieves their objectives, how durable the edge, the competitive edge is, and how it can perform, how the strategy performs in different market environments. Also, because of the flexibility that manager typically has, it's really important to understand the risk management process, governance, as well as operations.

As of course, is also transparency, a cost and liquidity profile of these strategies. Now, this is not an exhaustive list by any stretch, but hopefully gives you a sense of some of the important areas to consider to ensure that your investment experience is as good as advertised unlike some of the burger commercials that we see on TV.

Okay. So let's just take a minute to summarize some of the things that we've talked about today. We have seen strong interest in alternative investments, and we expect that to continue. We showed that alternative investments have generally delivered and met expectations. And we expect that to continue going forward.

We generally have positive outlook for certain alternative strategies, in particular, we talked about real estate and infrastructure, but we also highlighted some of the important considerations, especially around managing liquidity risk. And finally, we talked about the role that liquid alternative strategies can play in complementing both public market and private market investments. I hope you found this presentation helpful, and thank you very much for your time.