Mutual Funds ‘Vehicle of Choice’ for Alt Investments

More than twice as many assets in alt mutual fund as alt ETFs, Morningstar and Barron’s found

Two-thirds of institutions and 57% of advisors consider alternatives at least as important as traditional investments. Two-thirds of institutions and 57% of advisors consider alternatives at least as important as traditional investments.

Mutual funds are the “vehicle of choice” for institutional investors and advisors investing in alternatives, according to the eighth annual national alternatives survey from Morningstar and Barron’s.

The report found almost $300 billion invested in alternative mutual funds as of May. Total net assets in alternative exchange-traded funds were less than $120 billion.

Institutional investors used mutual funds for access to alternative strategies, however, they favored hedge funds and private pools for access to private debt real estate, and private equity, as well as collectibles like art. Advisors showed the same inclination, although they were less likely to invest in those particular strategies overall.

The 2013–2014 Alternative Investment Survey of U.S. Institutions and Financial Advisors surveyed 372 institutional investors and 301 advisors.

“Mutual funds continue to grow as the vehicle of choice for accessing alternative strategies. 2013 marked the strongest asset flows into alternative funds and the largest number of fund launches on record,” Josh Charlson, director of manager research, alternative strategies, said in a statement.

The report found 20% of institutions and 24% of advisors had alternative allocations between 6% and 10% in 2013. Another 18% of institutions had an allocation of 40% or more. Institutions have maintained significant allocations to alternatives for some time, according to the report. Most institutional respondents said they had an allocation over 25%, although the percentage has fallen from 34% in 2010 to 28% in 2013.

By comparison, just 9% of advisors had such a large allocation to alternatives in 2013, down from 11% in 2011 (the report offered no data for 2010). The percentage of advisors with an 11%-15% allocation has steadily increased from 20% in 2011 to 23% last year.

As for anticipated growth an alternatives allocations, institutions expect to maintain large allocations. Thirty-one percent of respondents reported they would increase their allocation to over 25% in the next five years. Almost half of advisors anticipated growth of between only 1% and 10%.

For both institutions and advisors, fees were the top reason for hesitating to invest in alternatives, although institutions were equally split between fees and lack of liquidity (40%). Half of advisors said fees were the main reason they didn’t invest in alternatives.

Both groups cited diversification and low correlation as the primary benefits to alternative strategies.

Respondents indicated they were fairly comfortable with their understanding of alternatives. Just 10% of institutions and 18% of advisors said they didn’t invest in alternatives because they didn’t understand them.

Two-thirds of institutions and 57% of advisors consider alternatives at least as important as traditional investments, the report found. However, the percentage of respondents who said they are “much more important” has fallen. Fifteen percent of institutions said alternatives were much more important than traditional investments, down from 20% in 2012; for advisors, the percentage fell from 8% to 3%.

“Advisors no longer consider alternatives to be ‘much more important’ compared with traditional investments, as alternatives have increasingly gained a core foothold in portfolios,” according to the report.

Respondents agreed that when picking an alternative investment, the manager or team’s experience was more important than other considerations. Twenty percent of institutions and 17% of advisors said that was the most important factor, more than the investment and risk management processes, the firm’s track record, or even fees. Just 4% of both advisor and institutional respondents said the manager’s investment in the strategy was an important factor in choosing the investment.

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