Dan Dobry
Dan Dobry

Do Alternative Investments Improve Investor Outcomes?

With today’s markets reaching all-time highs and interest rates staying at all-time lows, it has become more difficult for advisors and portfolio managers to diversify portfolios and find new opportunities for higher yields — are there uncharted opportunities in alternative investments for financial advisors and their clients. The good news is that with continued innovation and better access to multiple asset classes, there are more ways to diversify portfolios, streamline workflows, and deliver better performance.

Introducing “Outcome Investment Orientation Methodology”

“Outcome-orientation” is an important methodology for today’s investment management community. This maxim signifies those financial assets ought to be managed in such a way as to generate outcomes desired by investors. On the surface, it seems to merely emphasize the quintessential mission of the investment management business. It also underscores an important shift from a strategic asset allocation-oriented approach to more flexible and diverse investment approaches tailored to meet investors’ needs.

What makes our lives easier is that many types of alternative investments are inherently outcome oriented. When preparing the Outcome Orientated Methodology (OOM) we need to explore the different types of outcomes, that investors can pursue through an array of different alternative strategies. We also need to address a set of risk management considerations that can improve the probability of attaining one’s desired investment outcome.

Case Study Client X 

The client is the dual US and Israeli Citizen 

She is 52 years old, she lost her husband to cancer in 2007. She has a son and a daughter.  

Her son 22.5, is in the process of moving to Jerusalem to study theatre. He is independent and mostly self-sufficient. 

Her daughter 16.5, is advancing to the 11th grade in school. 

Her priorities are the welfare of her children and living a life of the security. 

Her main goals and objectives are: 

  1. To secure a sustainable cash flow that will finance her lifestyle.
  2. To optimize her estate and pass it on in an orderly and tax-efficient manner. 

Summary of the Financial Plan 

  • Financial Management: 
      1. It is recommended to prepare a budget based on your current expenses. You have estimated that you have expenses of 75,000 ILS a month ($23,076).
      2. Her estate today is estimated at $7.6 Million. This should sustain you for life. You have income from social security in the US. 
      3. We need to create a withdrawal strategy based on tax efficiency and sustainability. 
  • Assets and Asset Management 
      1. Most of her assets are in cash as she has liquidized some assets in the states. She has a portfolio of $1,159,000 (in an IRA account managed by Wells Fargo in the states). 
      2. She has a home in north Tel Aviv (after initial research it seems to be worth $2M). 
  • Tax Planning 
      1. She does not pay income tax. 
      2. She has a tax consultant in the US who does her tax returns. 
      3. When planning we need to explore potential taxes and liabilities and build a strategy to mitigate taxes.
  • Risk Management 
      1. You have significant exposure to USD. As you live in Israel you must take this into account. 
      2. Long-term care: in the event of long-term care you have income from your Insurance policy and income of $23,000 monthly from passive income. 
  • Retirement Planning 
      1. It is our goal to create passive income that can sustain you for life. 
  • Estate Planning 
    1. We need to look at the will you have prepared in the States and in Israel.
    2. I will define for you all expected taxes to be paid on your estate and a strategy for optimizing the transfer of these assets. 

Assets 

Passive Income in USD per month USD
Home * 3600 2,000,000
Sale of Property On the market 1,584,000
Cash in the US 1,015,000
IRA Account 591,500
25th Street  7875 2,590,000
Clarkson Street  210,000
Total 10,475* 7,994,000

Net Income after tax:  $9,427 a month 

Net Worth Client X: $7,794,000

Assets to Invest: $2,600,000 

Income Required:  $23,000 less $9427 = $13,573 

Strategy We need to create sustainable income from the $2.6 M 

To create an additional $13,573 at a benchmark return of 5% net (in 75% probability), we need to allocate to income-creating investments. 

Examples of income creating investments 

Long Term Care Fund (Spinal & Brain Damage) – target Return 8 – 12 %. To purchase existing purpose-built, high-end care homes for brain and spinal damage with high occupancy levels producing consistently high net profit margins. Acquire businesses at a discount to standard industry EBITDA ratio to improve investor yields and increase capital appreciation.

Diversified Alpha Fund is a venture debt mutual fund designed to protect capital from excessive market volatility, achieve long-term capital growth with a target of 8% net return per annum and generate discretionary quarterly dividends.

Student Accommodation Fund: investing across several geographies areas in the field of student accommodation. There is a huge and still-growing demand for higher education globally fuelling the need for modern and convenient accommodation for students targeting 6-7% returns. 

Mortgage-Backed loans: the Fund invests in short-duration real estate loans aiming to deliver a sustainable income yield, with low volatility. All loans are real estate-backed with additional collateral where appropriate, providing significant downside protection for investors targeting 6-7% annual returns. 

Reverse Mortgage Fund: the demand for retirement lending products is expected to increase and drive penetration as more retirees need additional sources of income to pay for their health and lifestyle choices, especially given shrinking pension pots in the wake of dwindling membership of defined benefit schemes and low yields on their savings. Targeting 7-8% returns. 

Supported Housing Fund: this is a long-term opportunity to create and invest in a residential property portfolio that provides the provision of supported housing to some of the most vulnerable in UK society. The strategy comes with long term government-backed inflation linked leases and is targeting 8-10 % net returns per annum (IRR). 

Fixed Income Opportunities: an experienced investor Fund that seeks to focus on asset-based direct lending by investing in a diversified portfolio consisting of rural, commercial, and industrial loans, leases, and finance agreements in the United Kingdom.

 The strategy is an absolute return – alternative investment designed to outperform traditional equity and fixed income based investments in terms of annualized market based risk. This is achieved by investing in a portfolio that carefully manages individual client and sector asset allocation risk to generate a steady stream of interest income with a low default risk both in individual cases and the wider asset class. 

The majority of lending activity will be project finance (typically renewable energy and waste to energy infrastructure but may also include specialist machinery, equipment, and vehicles) and secured on assets including land, buildings, personal guarantees, and sometimes government support incentives. Underlying borrowers include agricultural, farming, and food related businesses targeting 5-7% returns. 

About the Author
Dan Dobry was the founder of the Union of Financial Planners in Israel (UFPI), served as the first Chairman and President of UFPI. Dan was the Global Council Representative for Israel for the Global Community (FPSB) from 2012 - 2018 and from January 2019 is a member of the Committee for Standards and Qualifications for the European Union (SQC).
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