Clifford Jack’s position gives him a unique perspective on the alternative investment space.
The longtime executive with Jackson National Life oversees the company’s retail investment business, which includes Curian Capital, its managed account platform. Throw in the roughly 3,800 registered representatives affiliated with National Planning Holdings, Jackson’s broker-dealer holding company, and he has a broad view of the industry, to say the least.
“We talk to a lot of advisors and their clients, as you might imagine,” Jack says. “What they’re most interested in is diversification and smoothing out volatility. Currently, it’s the series of returns that is most important to them.”
As it happens, alternatives can help, an allocation to which positions portfolios well for fiscal cliffs, anemic growth and other uncertainties in 2013 and beyond. And consumers are beginning to notice.
A report form Cogent Research released in the fall found that 78% of all advisors are using alternative investments within client portfolios, mainly for diversification purposes. In the institutional space, KPMG International reported over the summer that 50% of institutional investors surveyed said they intend to increase their allocations to alternatives, with some intending to allocate more than 10% of their total assets.
“There are more investment options, more competition and more liquidity,” Cliff says of the current crop of alternative offerings, noting that the latter will be “table stakes” for financial services companies looking to enter the retail alternative space.
“It will have to,” he adds, when asked if the march toward liquid alternatives will continue in 2013. “Most retail investors are not able to afford the lockup that is so readily available to institutions.”
Alternative investments were criticized by industry watchers and consumer advocates in the wake of the financial crisis in 2008 for not performing to expectations, with many supposedly non-correlated asset classes behaving in a correlated manner. Has the problem since been corrected, and can they be trusted if a significant downturn or even recession were to occur in the coming year?
“A lot of the products were long/short products, and they had more correlation,” says Tim Clift, chief investment strategist with Envestnet PMC. “It was these early adopters that had trouble. There are now over 1,000 alternative strategies available, which result in more choices in the types of product, which in-turn makes them more prepared for what might happen in 2013.
“Alts have evolved, and in my view they are better able to dampen volatility and are less correlated than the last crisis,” Jack adds. “Who knows what the next crisis will bring, and the next crisis won’t behave as the last, but we’re seeing an expansion of products in each category, as well as an expansion in the number of categories themselves.”
For example, he notes the rise in the number of options in the global macro fund category now available to consumers, but also sees new categories like credit investments taking hold.
“Long/short funds have been around forever, but now you have things like long/short credit funds,” Jack explains. “Also, there are various new categories that traditionally did not offer liquidity, but do now; private equity would be one.”
Clift notes the 20% correction markets experienced the in 2011, and argues market-neutral, equity arbitrage-type strategies help up particularly well.
“We’re seeing an increase in the number of alternative funds, and definitely in asset flows,” he adds. “Investors are looking for strategies that are separate from market direction.”
Clift especially sees interest in alternative strategies involving fixed income.
“Interest rate risk is a major concern at the moment,” he says. “Once interest rates rise it will be a significant problem, especially with so much currently allocated to that asset class. Until now, much of the product development in alts has been on the equity side, with not as much seen on the fixed income side. That will change going forward, he says.
Alternative investments are now the fourth major asset class [joining equities, fixed income and cash], Clift concludes.
“We recommend an allocation of 20%, but we’re only seeing allocations as an industry in the 3% to 5% range, so we still have a long way to go.
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