Larry Berman

Berman's Call

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One forecast we heard recently was that over the next few years (fiscal 2027), the amount of new debt that needs financing in the U.S. economy will push the total debt above US$40 trillion, and the annual cost to finance that debt over $1.5 trillion per year, compounding the problem. By 2034, that amount is projected to be $54 trillion at who knows what annual cost. The outstanding debt along with a persistent inflation threat will likely mean that investors should be looking to other asset classes for lower risk investors. We believe this outcome means you need to rethink the safety and efficacy of public bonds in your portfolio.

In Canada, over the past decade, the bond market has not provided a positive real return to investors. In the past four years since COVID, the government bond market has had an annual average loss to investors of 2.85 per cent, while corporate bonds have had a positive annual return of 0.44 per cent. With inflation running at 2.5 per cent annually in the past decade and 3.8 per cent in the past four years, returns after inflation are tragic for investors. 

Over the years, we have discussed private credit markets before as a solution for many investors. This week and next in the Greater Toronto Area, we will see two private markets conferences. I’ll be attending both and believe that private markets should be an increasing part of your retirement portfolio.

A few weeks ago, I attended the NorthLeaf annual conference, where CPPIB head John Graham was a keynote. For all Canadians, CPPIB has more than 60 per cent of investments in private markets. There is a good reason why they have been amongst the top sovereign wealth funds in the world over the past decade.

I began to get very concerned about bonds protecting investor portfolios around BREXIT in 2016 when the negative-yielding government debt in the world (Japan, Europe) moved above $10 trillion. Today, because of inflation, there is no more government debt with a negative yield – a not-so-funny thing about inflation and its impact on your purchasing power.

From an investment standpoint, it’s a very difficult asset class for individuals to get exposure to. There’s an ETF (VPC) that gives exposure to public companies and funds that offer exposure to private lending, but it can have high volatility associated with public markets, so it may not be appropriate as a fixed-income replacement in your portfolio when compared to the broad U.S. bond ETF (AGG) or the high yield ETF (HYG) in terms of volatility mitigation.

Without an explicit endorsement, there are some private lenders and alternative asset managers out there worth having a look at to see if they are appropriate for your portfolio. My firm, www.qwealth.com, is building portfolio solutions similar to CPPIB and has some private investments that may make sense for your portfolio, too.

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