“In general, we think that alternatives are generally in the range of from zero to 20% of assets at any given time, with individual clients’ holdings in that range, too,” said Laura Thurow (left), CFA, co-director of Private Wealth Management Research for Baird, in an interview with AdvisorOne on Monday.
“Given the industry environment, when equity markets get tough, investors usually go to bond via reallocation and vice-versa,” Thurow explained. “When both markets are facing challenges, lots of advisors and their clients are asking, ‘Where do we look?’ ”
Alternatives can be a “nice destination” for some assets, she says, since clients may be looking to reallocate some funds into investments with low correlations to traditional equity and fixed-income markets.
“This is an area with more complexity and less transparency that other investments [like equities and bonds],” Thurow said. “It is important, since this class of investments performs differently, that professional advice is given and received as much as needed for clients.
Baird, which now includes more than 700 financial advisors and about $65 billion in total assets under management, recently published a white paper entitled “Demystifying the Role of Alternative Investments in a Diversified Investment Portfolio” as a tool for advisors to help clients better grasp alternative assets and the role they can play in their portfolios. Some products mentioned in its research are private equity, fund of hedge funds, managed futures and structured products.
“Baird is not necessarily doing things differently at this time,” Thurow said, “but the market environment is more inductive to alternative investments than in past.”
According to Baird, the Morningstar Alternatives Category has almost doubled in three years, the senior vice president says, and had some $70.7 billion in funds through June 30, excluding assets in precious metals, according to Baird. Earlier this week, the value of the SPDR Gold ETF (GLD) surpassed that of the SPDR S&P 500 ETF (SPY) for the first time.
Overall, Thurow explains, Baird looks at gold, for instance, as a currency hedge against the dollar. “Alternatives can be used as alpha generators or diversifiers,” she noted. “As diversifiers, they work as a strategic allocation within a portfolio given their low correlations with other holdings.”
In general, advisors aim to be sure clients “can sleep at night,” explains Thurow, and this approach lends itself towards the use of alternatives for diversification, the executive added.
According to Baird, educating clients in ways to successfully implement alternative strategies can be a competitive advantage for advisors.
“We are now talking to every client about alternative investing as a standard part of our practice,” said Tom Heidenrich, senior investment consultant in the firm’s Chicago wealth-management office, in a statement.
“We’ve seen a 180-degree change in the availability of alternative products and solutions over the last 10 years. As a result, more than 75% of our clients today have some alternatives in their portfolios up from 10% to 15% just five years ago,” the advisor explained.
Heidenrich says he spends a lot of time discussing the merits of alternative products and key aspects of these associated investment strategies. “While the client education process takes more time, we feel it is important to offer strategies that can help diversify their portfolios and reduce risk without sacrificing much in terms of returns,” he noted.