Mortgages: An Essential Pillar of a Diversified Portfolio

At a Glance

• Mortgages are an alternative asset with fixed income characteristics.
• Risk is mitigated by real asset backing and structural protections.
• Mortgages sit between bonds and private debt on the risk‑return spectrum.
• Alternative assets play a growing role in modern portfolios.
• Mortgages complement, rather than replace, other asset classes.

For generations, stocks and bonds have formed the foundation of most investor portfolios. Over time, however, alternative assets have taken on a more meaningful role in portfolios as investors seek greater diversification.

Alternative assets, such as real estate, mortgages, infrastructure, private equity, and private debt, can introduce different sources of returns and risk that don’t always move in step with public markets. When combined thoughtfully with traditional assets like stocks and bonds, these assets can help balance portfolios across market cycles. Reflecting this shift, investment in alternative assets across Canada has increased meaningfully over time.

Mortgage Fundamentals

Mortgages can play an important role in diversified investment portfolios. They are classified as an alternative asset because they are privately structured investments that have historically exhibited low correlation with traditional assets.

At their core, mortgages are loans secured by real estate, where the underlying property serves as collateral for the loan. While individual mortgage structures can vary, the asset class is generally characterized by regular interest payments and a defined repayment schedule, which can support relatively predictable income streams.

Mortgages also typically have fixed loan terms, typically ranging from one to five years. As a result, investors generally receive their full return of capital, along with periodic interest, only at maturity. This structure makes mortgage investments relatively illiquid, as they are designed to be held to maturity and are often difficult to sell in secondary markets prior to their maturity.

Why Illiquidity Matters

This illiquidity feature of mortgages represents a key risk that is typically compensated for in two primary ways:

• Higher income potential: Investors may be offered the potential for higher yields in exchange for accepting longer investment horizons and lower liquidity compared to traditional fixed income securities.
• Reduced price volatility: Lower liquidity can result in more stable valuations, which may help smooth overall portfolio returns when combined with more liquid, more volatile assets. At Nicola Wealth, we recognize the distinct role mortgage investments can play in a diversified portfolio. They have formed an important part of our investment approach since 2009, and we continue to evaluate opportunities that allow clients to access the asset class in a thoughtful, portfolio-aware manner.

 The Building Blocks of a Portfolio

Before comparing mortgages to other asset classes, it can be helpful to revisit the foundational elements of a well-constructed portfolio. These can be broadly grouped into three primary components:

1. Equities Equities represent an ownership interest in companies and are most commonly held as publicly traded stocks, which offer liquidity and a return profile that combines income (such as dividends) with capital appreciation.Because of their enhanced liquidity, equities also tend to exhibit higher price volatility, with their values and returns influenced by a range of economic and business factors, including corporate earnings, interest rates, political developments, and overall investor sentiment.
2. Fixed Income Fixed income securities are designed to provide regular income and support capital preservation. This category is traditionally associated with government and corporate bonds, which, like equities, are highly liquid and actively traded in public markets.Historically, a significant portion of global capital has been allocated to fixed income assets. Given their relatively predictable income profile, fixed income securities often play a stabilizing role in investment portfolios, helping to reduce volatility relative to equities.
3. Alternative Assets Alternative assets encompass a broad range of investments, including tangible assets, such as real estate and infrastructure, as well as privately structured securities that differ meaningfully from traditional public market assets. Certain alternative investments, such as private equity, private debt (direct lending to private companies), and mortgages share characteristics with both equities and fixed income, while introducing distinct risk exposures. These features have historically contributed to lower correlations with publicly traded stocks and bonds.Alternative assets can offer varying degrees of liquidity, but privately held investments, including real estate, infrastructure, private equity, private debt, and mortgages, are typically defined by their relative illiquidity. As discussed earlier, investors in these securities are generally compensated for this illiquidity risk through a return premium.Taken together, the unique characteristics of alternative assets along with their distinct risk premia can enhance diversification and support portfolio resilience when used thoughtfully.

 Diversification in Practice

An example of portfolio diversification that incorporates exposure to these core components is the Nicola Core Portfolio Fund. The figure below illustrates the fund’s holdings by asset class as of March 31, 2026:

Nicola Core Portfolio Fund Holdings by Detailed Asset Class

How Mortgages Compare with Similar Options

To provide additional context, we compare mortgages with other fixed income and alternative investments, highlighting key structural differences and historical performance characteristics.  

As noted earlier, mortgages are fundamentally fixed income securities but are classified as alternative assets due to their private structure, collateral backing, and illiquid profile. Accordingly, the comparisons below include traditional fixed income assets, such as government and corporate bonds, as well as alternative assets like private debt.

Government Bonds

Highly liquid, publicly traded securities that offer relatively predictable income with historically low default risk. Government bonds are generally lower-yielding investments with returns primarily influenced by interest rate movements.

Corporate Bonds

Liquid, publicly traded securities that provide relatively predictable income and relatively low default risk. Corporate bonds represent loans to typically larger, higher-quality issuers, and typically offer higher yields compared to government bonds, with returns influenced by corporate earnings and interest rates.

Private Debt

Illiquid, privately structured investments that aim to provide relatively predictable income with higher default risk than public bonds. Private debt typically involves direct lending to private companies, allowing for greater customization and, in many cases the potential for higher yields. Private debt returns are primarily influenced by corporate earnings and interest rate conditions.

Mortgages

Illiquid, privately structured investments that aim to provide relatively predictable income and are secured by real estate collateral. Mortgages may be issued to private corporate or individual borrowers, and like private debt, can be highly customizable in structure.

Mortgage returns are generally influenced by real estate conditions and interest rate movements and have historically offered higher yields relative to traditional public income securities.

A Side-by-Side Comparison

The chart below provides an illustrative comparison across liquidity, investment horizon, risk and return characteristics:

The figure below provides an illustrative comparison of returns across select fixed income categories, showing average annual returns between January 2021 and December 2025. Actual performance during this period echoes the differing risk profiles outlined above.   

Within a diversified portfolio, mortgages have historically occupied a position between the risk-return profiles of publicly traded bonds and private debt.

What This Means for Investors

Diversification is not simply about owning different investments. It’s about balancing multiple sources of risk and return. Mortgages are unique investments that combine features of traditional fixed-income assets with characteristics of other alternative assets, such as real estate and private debt.

While not a direct substitute for any single asset class, mortgages can serve as a complementary holding in a diversified portfolio. For long-term investors, the value of an asset class often lies less in any single feature than in how it behaves alongside everything else. Mortgages play a key role in our portfolio for that reason: they are durable, well-secured, and patient by design, the kind of holding that does its work quietly across cycles.