Strategic Wealth Partners was acquired by Kovitz Investment Group Partners, LLC ("Kovitz"), a registered investment adviser with the SEC on May 1, 2024. Strategic Wealth Partners is now a division of Kovitz and its registered investment adviser. Materials created prior to this date were created by Strategic Wealth Partners and are accurate as of the time of publishing.

Investing In Alternative Equity at SWP

Recently, I wrote about alternative credit and the rationale we use for this type of alternative asset category at Strategic Wealth Partners. Another area of alternatives we use extensively is what we term “alternative equity.” In order to discuss this topic, traditional equity investing first requires review.

Why do people invest in equities to begin with?

An equity investor has the opportunity to participate in the growth of a company. A company’s value is reflected in a company’s profits, growth in profits, and distributions from those profits in the form of dividends.

The stock market is a culmination of public companies’ innovation and growth. The participation in the individual company’s stream of cash flows, and therefore, the market’s stream of cash flows is factored with many other variables. What is so attractive about equities is the unlimited upside potential. The flip side of this equation is a change in any of the variables that determine stock prices can result in a decline in value over the short and long-term.

For example, imagine Company A that creates a new widget. Everyone loves the widget and demands as much as the company can produce. This generates high profits, and since demand continues year-after-year, Company A’s stock price goes up year-after-year. Profits are so good that other companies develop similar widgets. This competition ultimately impacts Company A’s growth, and their stock price stalls or even falls in value. Depending on when one invests in A’s stock and when or if they sell, their return may vary dramatically.

This scenario creates uncertainty inherent in the concept of stock market investing. In fact, macro variables such as possible recessions, rising interest rates, and higher inflation may also negatively impact stock prices despite positive company performance.  All types of uncertainty result in high variability of stock prices and stock market values. The net is investors can experience periods where markets provide high returns of 25% or more per year and periods of no growth or worse, declines in values of up to 50% or more. Fear of losses and discomfort with the variability of returns will often reduce an investor’s desire to own stocks.

What if this variability could be harnessed and results were made more predictable?

In the most basic construct, that is what SWP’s alternative equity investments attempt to achieve. We look for strategies that take some of the uncertainty out of stock investing. In some cases, investors can still participate in the unlimited upside of the stock market, while other investments offer some growth along with more predictable outcomes than traditional fixed-income investments. This overall concept has proven to be very attractive to clients looking to achieve their goals with much less angst. And isn’t that why we invest in the first place?

An Example of Alternative Equity | Structured Notes

The structured note program we started in 2015 provides an example. At that time, 3-year investment grade bonds were yielding 1.25% -1.50%, far below what clients needed to reach their objectives. Stocks had their usual growth potential, but also had their inherent volatility, making them uncomfortable to hold as a large allocation of a portfolio.

We found a major bank willing to contractually agree to pay 7.25% per year for three years if the S&P 500 was higher in three years. It didn’t even matter how much higher; It could be one point higher! Additionally, if the market dropped 17% or less, the bank would guarantee the investor would get their original investment back. This investment offered a return that met most client’s needs, which they could not get from bonds yet with much more certainty than a traditional stock market investment. This is precisely the type of investment we classify as “alternative equity,“ as the outcome is determined by the stock market.

Additional Strategies

In addition to structured notes, we also utilize ETFs and mutual funds that can generate reasonable returns while reducing the variability of traditional equity investing. They are similar to structured notes in that an investor’s return during a period of time is pre-defined based on wherever the stock market ends up. These strategies offer daily liquidity and are built to help investors participate in equity market gains, while offering some protection against market declines.

There are other strategies that we utilize that offer the unlimited upside of stock investing yet manage the downside so often dreaded by investors. These are frequently offered through limited partnerships, which can have restrictions on participation. Many of these partnerships have achieved returns that stock investors hope to achieve with a fraction of the variability. How these returns are generated is beyond the scope of this report but can be reviewed upon request.

Stock market investing is attractive as returns over time can be significant, but volatility is all but assured. Alternative equity strategies utilized by SWP are designed to help investors reach their goals while reducing the volatility that they find uncomfortable.

Please contact a SWP team member to find out if alternative equity strategies are appropriate for your portfolio.    

The information herein was obtained from third party resources that Strategic Wealth Partners (“SWP”) deems to be reliable as of the original date of publication. SWP does not provide legal or tax services. The information provided is for general informational purposes only.

Disclosure:

    This article contains general information that is not suitable for everyone. The information contained herein should not be constructed as personalized investment advice. Reading or utilizing this information does not create an advisory relationship. An advisory relationship can be established only after the following two events have been completed (1) our thorough review with you of all the relevant facts pertaining to a potential engagement; and (2) the execution of a Client Advisory Agreement. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

      Strategic Wealth Partners (‘SWP’) is an SEC registered investment advisor with its principal place of business in the State of Illinois. The brochure is limited to the dissemination of general information pertaining to its investment advisory services, views on the market, and investment philosophy. Any subsequent, direct communication by SWP with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of SWP, please contact SWP or refer to the Investment Advisor Public Disclosure website (http://www.adviserinfo.sec.gov).

      For additional information about SWP, including fees and services, send for our disclosure brochure as set forth on Form ADV from SWP using the contact information herein. Please read the disclosure brochure carefully before you invest or send money (http://www.stratwealth.com/legal).

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