Fluctuating trade policies have led to heightened market volatility, however alternative investments' focus on income and income growth is expected to provide stable returns in these more turbulent times. Alternative assets such as commercial real estate, private credit, and infrastructure provide more stable returns and have a lower correlation to traditional equities and fixed income investments. As a result, when alternatives are included in an investment portfolio, they act to enhance returns while lowering volatility.

While the short-term impacts of evolving trade policies are expected to increase volatility, the long-term impacts are more uncertain and will depend on implementation, duration, and scope. Trade policies may increase inflation and in an inflationary environment, alternative assets tend to outperform given their inflation-linked income and ability to pass on heightened costs. Overall, TD Asset Management Inc. (TDAM, "we") believes alternative investments' stable returns and low correlation, make them an important component of an investment portfolio. The following examines the potential impacts of trade policies on each alternatives asset class.

Real Estate

In a trade-war scenario, businesses/tenants are on the front-line of economic impacts while commercial real estate owners are insulated.  This is a product of real estate providing essential services to businesses/citizens and the reciprocation of contractual leases that drive real estate performance.  Sustained tariffs would impact new leasing activity; however, TD Greystone Real Estate Strategy ("Real Estate Strategy") impacts would be marginal due to a 93% committed occupancy, a 6-year average lease term and a gap-to-market rent of 20% for the overall Real Estate Strategy.

Businesses (public or private equity) profits directly participate in economic volatility.  Companies/tenants are the first to realize gains due to economic prosperity and evolving customer preferences, and similarly, the first to experience the downside of this.  Conversely, commercial real estate is in the essential business of 'keeping the lights on' for tenants and generally does not participate in the volatility of business profitability.  Pronouncing how economic turmoil moves through a waterfall of investor impacts and how real estate impacts are behind two lines of defense; (1) the business's (tenants) balance sheet and (2) more discretionary business spending (travel, marketing and employee headcount), before putting the existing lease at risk.

Keeping this in mind, a sustained trade war and a potential recession would reduce new leasing demand overall with the defensive multi-family sector experiencing the lowest impact. Considering that 93% of the Real Estate Strategy's space is occupied with average lease terms of 6 years, we observe minimal sensitivity to near term leasing weakness. For the marginal vacant space and the fraction of leases that are renewing in the next 12 months, the Real Estate Strategy has a gap-to-market rent buffer of approximately 20%.  Meaning that market asking rent for our existing space is 20% greater than what we are currently collecting.  The increase in market rent vs. the Real Estate Strategy's actual rent is due to demand outpacing supply for our properties. Illustrating how real estate performance boils down to supply and demand and how the Canadian market is largely undersupplied (Class B & C office, aside). Nevertheless, the Real Estate Strategy's gap-to-market rent serves as a substantial shock absorber for any new leasing weakness, as the Strategy could drop new asking rent by nearly 20% and still experience income growth.

Mortgages

Although no asset class lives in an economic vacuum, commercial mortgage performance is well-insulated from a sustained trade war and economic recession.  Tariffs would impact public equity or private equity owners of the business/tenant first, discretionary business spending second (marketing, headcount, travel, etc.), the real estate owner third, and potentially the mortgage holder thereafter.  Significant risk buffers for Mortgage investors, demonstrated by the debt-service-cost ratio (DSCR), and strong security positions on the underlying properties, provide additional protection.

The TD Greystone Mortgage Strategy's ("Mortgage Strategy") principal and interest payments (income generation) are serviced by existing contractual leases.  The existing leases are providing income to our borrowers that is substantially above their debt service costs, demonstrated by a portfolio DSCR of 1.5X.  This essentially means that the Mortgage Strategy could observe an overall underlying property vacancy increase of 50%, and the Mortgage Strategy's average borrower would still have sufficient leases to service our mortgages.  Further protection is provided by the mortgages being secured by the underlying properties, which are currently valued at nearly twice as much as the mortgage holdings in the Mortgage Strategy, as demonstrated by the Mortgage Strategy's overall loan-to-value ratio of 57%.

Infrastructure

The TD Greystone Infrastructure Strategy's ("Infrastructure Strategy") focus on contracted, essential cash flows insulates the portfolio from broader economic volatility. Our Infrastructure Strategy is built on investing and growing assets that have long-term contracted and essential cash flows. The Infrastructure Strategy is a globally diversified, multi-sector portfolio with diverse revenue streams. The contracted nature of the cash flows helps to protect portfolio returns from broader economic impacts as much of these contracts include the ability to pass on heightened costs.  Ultimately, the essential nature of our infrastructure portfolio positions our clients well to withstand heightened volatility in the broader economic market. A sustained trade-war would be inflationary in nature and infrastructure has historically performed well with its ability to pass on inflationary costs.

The Infrastructure Strategy assets with the greatest perceived exposure to global trade are marine ports, however ports are critical infrastructure with monopoly-like characteristics given their established locations and interconnection to the broader economy. While trade flows from various countries may shift and there may be changes in the types of goods being imported/exported, there will still be a major need for ports, as more than 80% of global trade is seaborne. Our ports portfolio is well diversified with holdings in 48 locations across 17 states in the U.S., 2 cities in the Netherlands and 3 cities in Italy. The revenue streams and types of goods being transported are well diversified which should help offset any pullbacks in any one area. While the composition of the goods being transported may shift there will still be a need to move goods.

We expect to see higher demand on storage at ports as users such as manufacturers, shippers and distributors look to safeguard their supply chains from any disruptions, which will generate additional revenue for the portfolio. We have seen a move from "just-in-time" to "just-in-case" inventory management which is leading to increased revenues, longer-term contracts, and higher need for storage space, a theme we expect to continue over the next decade. There is also a geo-political need for strong ports which support maritime activity across strategic industries including the military. Overall, the ports' essentiality and their diverse locations and revenue streams helps to mitigate trade disruptions from the impact of tariffs.

Another segment with perceived exposure is the U.S. solar industry. While broad tariffs will have an impact on the cost of materials and equipment for construction, our investment Silicon Ranch Corporation ("SRC") has significant scale and has been successful in securing supply contracts. The solar industry has been operating under tariffs since 2012, which were in place during Trump's first administration, and is currently facing 22%-240% tariffs on Chinese manufactured solar panels. As a result, SRC had already been focusing on domestic content with the goal of having all projects use majority domestic supply. SRC has an exceptional track record of growing through signing long-term power purchase agreements and then constructing and bringing new operating projects online, including through the first Trump presidential term. Since SRC began operations, they have successfully delivered every project for every signed power purchase agreement. These contracted cash flows provide stability to the Infrastructure Strategy and serve as an inflation hedge with built in pricing escalations.

Overall, while there may be short-term noise caused by U.S. Tariffs, we believe the Infrastructure Strategy's focus on contracted, growing cash flows and the diversification of the portfolio will continue to provide strong risk-adjusted returns.

Private Debt

TDAM private debt underwriters live by the mantra that the best risk management occurs at the underwriting stage. Loans made by our private credit strategy are highly negotiated, bespoke credit arrangements that often feature robust covenant packages, pre-payment pools, reporting packages and liens against real assets, all of which reflect the fact that risk management is constructed at the underwriting stage, since we cannot later repair poor underwriting with dispositions or opportunistic reduction in exposures. Our Investment Grade (IG) credit strategy's focus on infrastructure, renewable energy and strong IG corporate sponsorship all reveal a reliance on long-term contracted, essential cash flows to insulate the portfolio from broader economic volatility that can be induced by geopolitical challenges like tariffs.

We would be remiss if we did not drill down into the areas expected to be most affected by the current slate of proposed or threatened tariffs. We feel that the sectors that are expected to be most impacted– due to their dependence on trade with the U.S. are: automobiles/OEM manufacturers, commodities/clean energy and transportation/trade assets.

Firstly, the private credit strategy has little exposure to Internal Combustion Engine automobile manufacturing or export. Secondly, there is limited exposure to commodities of any kind, particularly on the volumetric or GDP linked side. For example, our strategy has exposures of roughly 3% to 4% to midstream/pipeline assets, all of which would be geographically within Canada. Those loans are generally characterized by 'take or pay' contracts with IG counterparties and are not based upon volumetric flows or commodity pricing. Hence, our loans are by design built to be resilient to pricing or volumes.

One area that could arguably be impacted by GDP and trade-linked activity are the loans to west coast ports the strategy holds, although those loans are immaterial in size with under 2% of strategy exposures there. Loans to container shipping ports on the west coast of Canada were underwritten with conservative coverage ratios to account for the possibility of trade flow volatility - but that would be one of the few areas of strategy exposures that would see volumetric declines from macroeconomic forces.

A second perceived area or potential weakness is the strategies' significant allocations to renewable energy generation – wind farms and solar farms being prime examples. The fear around this asset class is that U.S. policy, which previously offered generous support for 'green and clean' energy production under the U.S. Inflation Reduction Act ("IRA"), would end all forms of financial support and render such projects less economically viable. TDAM can report, however, zero exposure to renewable energy production in the U.S. Our private debt strategy targets jurisdictions – Canada and Australia primarily - that offer government-sponsored (through the provincial or equivalent governmental power authority) Power Purchase Agreements ("PPAs") that insulate renewable projects from demand and commodity price fluctuations. As the U.S. has been a jurisdiction that transfers volumetric and price risk to project owners – meaning producers face so-called 'merchant' risk, it is a geography that we have avoided for this sector.

Lastly, it is worth considering how trade and tariff disputes can impact macroeconomic variables like sovereign interest rates. It is worth reminding readers that all underlying loans in the strategy portfolios are long-dated illiquid securities, with no active trading or opportunistic positional moves – they are strictly duration-matched against the benchmark. Our portfolio of underlying loans is spread across the curve at a variety of key rate duration points, aiming to minimize any curve effects versus the benchmark. That being said, adverse economic impacts against the Canadian economy are strongly expected to elicit interest-rate cuts from the Bank of Canada, which would arguably assist a general reduction in interest rates across the yield curve, which would (given the fixed-rate duration the strategy exhibits) serve to increase bond pricing and provide a nominal tailwind for positive Fund returns in this period.

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