Portfolio > Alternative Investments

Mix It Up

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In these volatile fiscal times, advisors say alternative investments can be a key ingredient in a client’s retirement portfolio.

As much as their emergence in the mainstream is a relatively recent phenomenon, so-called “alternative” investments are hardly new to the advisors at Partners Wealth Management. “We’ve been using them for 20 years,” says John Freiburger, CLU, ChFC, AEP, managing partner at the Naperville, Ill.-based firm, which serves primarily high-net-worth clients.

Now, it appears mass-market investors and their advisors are catching on, too, as they look beyond traditional portfolio models in search of protected growth and an antidote to equity market volatility leading into and during retirement. Indeed, to meet the challenges presented by the new, highly volatile realities of today’s market landscape, more advisors and investors favor a strategy that incorporates alternative investments over the traditional stocks-and-bonds asset allocation model (see sidebar on page 56).

“Our research confirms that financial advisors are questioning the merits of time-honored portfolio construction strategies and looking for new solutions,” says John T. Hailer, president and CEO at Natixis Global Asset Management in Boston. “We think that by putting risk [mitigation] first, managing volatility and incorporating alternative investment strategies, investors can both reduce risk and produce the growth that will help allow them to meet their long-term savings goals.”

For the senior client

Once reserved for a narrow slice of the investing public, alternative investments—a broad category of vehicles that includes non-traded REITs, managed futures, private equity/venture capital and many more—are finding greater traction with mainstream advisors and investors, including seniors. A new generation of products built around alternative investments, from annuity contracts to mutual funds to ETFs, come with minimums that make them accessible to the mass affluent market, not just accredited or institutional investors.

The appeal of alternatives lies mainly in their ability to not only diversify and grow a portfolio but also to protect a retirement nest egg from volatility. Their lack of correlation to stocks and bonds is what attracts wealth managers such as Richard Grund, AIF, and Irwin Gross, RFC, CFS, AIF, of Family Wealth Partners in Weston, Fla. “Non-correlated assets can help control volatility, and at the same time they can provide growth and income,” explains Gross.

“Really what we’re doing is using risk- controlled types of instruments as a way to keep clients on track with a balanced portfolio,” adds Grund.


The heavier reliance on alternative asset classes in portfolio construction results largely from the current prolonged period of high equity market volatility, along with sagging yields from traditional fixed income instruments, plus the apparent erosion of the non-correlative relationship between stocks and bonds, say Freiburger and Jason Mirabella, his colleague at Partners Wealth Management. As a result, “advisors have to be more innovative in managing risk and minimizing volatility,” asserts Mirabella.

Such market conditions are “forcing advisors to look at new ways to capture yields,” observes Freiburger. “That’s one of the most challenging things we as advisors face today.”

To meet those challenges, Partners Wealth is steering some of its older clients toward a portfolio model that includes anywhere between 10 percent to 30 percent non-correlated assets (depending on individual risk profile and liquidity needs). They’re allocating money to alternatives that they otherwise might have put in diversified global equity instruments and traditional fixed income vehicles, for example.

For clients of Gross and Grund, meanwhile, these days the portfolio mix typically includes roughly 5 percent to 15 percent alternatives. However much a portfolio is weighted with alternatives, the overarching goal, says Grund, is “to capture positive equity returns when markets are doing well but to have something in the portfolio that moves them toward their goals and keeps pace with inflation when equities aren’t performing.”

Retirement income planning is a key determinant in configuring a portfolio with alternative investments, say wealth managers. Gross says in many cases he looks for alternative investments with higher yield potential, such as a preferred stock ETF, “because at some point with the senior age group, they’re going to need income from their portfolio.”

Putting such a model into practice is predicated on the client being comfortable devoting a significant chunk of their portfolio to investments with which unfamiliarity might breed hesitance. “It can take a significant amount of education time with the client,” says Freiburger. “A client has to understand that while there may be more volatility associated with that individual [alternative] investment, in the big picture we are trying to reduce the volatility of the portfolio. If they’re not comfortable with that, we’re not going to go there.”

That enthusiasm is doused somewhat by results of the fourth annual U.S. alternative investments survey by Morningstar and Barron’s. Overall, financial institutions reported a retreat in interest and investment in alternatives in 2011 after three consecutive years of growth. According to Morningstar and Barron’s, the $23.2 billion in alternative mutual funds inflows in 2011 represented a drop of $1.8 billion from 2010. What’s more, 26 percent of the institutions surveyed indicated they plan to allocate more than a quarter of their portfolios to alternative investments, down from 37 percent in the previous survey.

Still, a majority of advisors (64 percent) indicated in the Natixis survey that they are apt to employ alternative investment strategies for mass-market clients with $200,000 to $300,000 in investable assets.

What kinds of alternative investments are they most likely to use? According to Morningstar and Barron’s, institutions identified long/short equity (or debt) and private equity/venture capital as the top two strategies for increased allocation, followed by managed futures. For the second consecutive year, advisors cited managed futures as the asset to which they were most likely to increase their exposure.

Do your due diligence

Putting an alternatives-infused model to work is also predicated on extensive due diligence. The uneven recent performance of some alternative classes puts a premium on wise—and suitable—product selection. “There are a ton of these strategies out there that haven’t worked,” notes Grund.

With senior clients, Grund and Mirabella say they tend to prefer alternatives that mitigate the possibility of irreversible loss of principal. “You really have to try to identify the true risk associated with individual [alternative] investments, because you can lose 100 percent of your principal,” asserts Mirabella. “We tend to avoid those types of products.”

Before investing in an alternative, it’s also important from a liquidity standpoint to recognize that some instruments will tie up a client’s money for five, seven, even 10 or 15 years. “You really have to watch your exposure,” advises Grund.

The huge and rapidly growing array of alternatives can make due diligence a daunting, yet necessary, task. Grund prefers products offered by solid, reputable companies that have a performance track record of at least three to five years. “You want live data, not just simulated data,” he says. Advisors should also lean on their broker-dealer for help screening and evaluating alternative products, adds Freiburger.

Match the client with the product

Once the due diligence dust settles, it’s time to match client with product. Freiburger and Mirabella say they tend to lean heavily on managed futures and sometimes commodities (such as timber) and non-traded REITs for the alternative component of many client portfolios, mainly for their powerful non-correlated qualities. When outsized returns are the goal, they might look to high-risk, high-reward vehicles such as private placement and private equity arrangements. For income, they might consider oil and gas exploration offerings, for example.

Grund says he tends to seek out alternatives that sacrifice some upside to limit risk, such as commodity funds that offer downside protection and institutional management. On the income side, meanwhile, he and Gross often recommend ETFs of dividend or preferred stocks as an alternative to bonds. For solid returns, they might also turn to a fund that involves a put-call strategy on the S&P 500, for example, or a fund that involves real estate triple net lease investments.

These are the building blocks of a contemporary investment portfolio.

Alternatives Run Hot & Cold

While the investment community continues to buzz about alternative investments, performance concerns may be tempering that enthusiasm, according to new research.The buzz surrounding alternatives remains strong. In Natixis Global Asset Management’s 2012 U.S. Advisor Study, roughly half (49 percent) of the 163 U.S. advisors who responded (representing approximately $670 billion in assets under management) said they regularly employ alternative investing strategies across their client base. Within that segment, 79 percent said they do so to improve diversification, 68 percent to reduce risk, 51 percent to enhance returns, and 42 percent to dampen volatility.


Got Gold?

After decades of being put down in certain investment circles, the shiny, yellow metal is making a mainstream comeback.

Some of our most iconic and enduring images throughout history and popular culture have a gilded tint to them. When I think of the precious metal, I’m reminded of King Midas, the treasure troves of ancient Egypt, the California gold rush and the 007 villain Goldfinger, just to name a few.

However, while we love gold in our movies and mythology, gold as an investment has been frowned upon in many mainstream circles, dating back to the jettisoning of the gold standard in the ‘70s. I learned from my parents and grand-parents to buy your blue-chip stocks and hang onto them.

I still remember my grandmother handing me an IBM stock certificate in 1979 and thinking how cool it was to hold that asset in my hands. Although, I didn’t tell her, it would have been even cooler to hold a gold coin, the preferred asset of pirates and kings.

But gold bugs are popping up all over. They’re no longer on the fringes or hiding in plain sight. If you’re not a “goldmember” yourself, you probably know one. I sure do. I married into a family of them. And my in-laws are hardly the exception.

A recent Bloomberg Businessweek article states that “billionaire John Paulson raised his stake in an exchange-traded fund tracking the price of gold while selling other stocks during the second quarter, leaving his $21 billion hedge fund with more than 44 percent of its U.S. traded equities tied to bullion.”

The article goes on to say that “Paulson & Co. purchased an additional 4.53 million shares of the SPDR Gold Trust, the firm’s largest position, and bought more shares of NovaGold Resources Inc.”

And, in a recent correspondence, Jeffrey Nichols, Senior Economic Advisor to Rosland Capital, tells me he’s over the moon in his love for gold as an investment. “I’ve been unwaveringly bullish on gold for nearly a decade…and suspect I’ll remain bullish for at least a few more years. Indeed, I strongly believe that the price of gold will more than double—and possibly triple—before the end of this decade.”

But Nichols is clear in his defense of the asset. “Please don’t label me a gold bug. I see nothing magical about the yellow metal…and those who attribute to it miraculous powers or foresee it resuming its sometimes historical role as the central anchor of the world monetary system are sure to be disappointed. 

“I consider myself a dispassionate economist, analyst, and observer of the U.S. and global economic, political, societal and demographic trends—and what I see ahead is a super-bullish long-term future for the yellow metal,” Nichols says.

Whether gold is right for you as a personal investment or as a recommendation to your clients, there’s no denying that the yellow metal that entranced everyone from ancient sailors to the miners of the Great American West is making its way back as a treasured asset.-Daniel Williams

“You really have to try to identify the true risk associated with individual [alternative] investments, because you can lose 100 percent of your principal.”
Jason Mirabella, Partners Wealth Management