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Portfolio > Alternative Investments

Most Advisors Say Alts Just as Crucial as Traditional Assets

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Financial advisors and institutions continue to boost their interest and client assets invested in alternatives.

Nearly 65% of advisors allocated between 6% and 20% of their clients’ portfolios to alternatives, according to a recent Morningstar report, and 15% anticipated allocating more than 20% over the next five years. Only 4% of advisors said their typical client had no money in alternative investments, down from 17% in the research firm’s 2008 survey.

Plus, 56% of financial advisors say that alternatives are as important, somewhat more important or much more important than traditional assets, namely due to diversification.

Morningstar conducts its alternative-investment survey each year in cooperation with Dow Jones and Barron’s, and the most recent poll, conducted in March, included input from 471 advisors and 235 institutions.

More than 20% of institutions, compared with 17% last year, said they expected alternative investments to make up more than 40% of holdings over the next five years, while 43% allocated 10% of less to alternatives.  

In addition, Morningstar reports that all seven of its alternative mutual fund categories have seen inflows over the past five years. These categories include nontraditional bonds, multi-alternative, market neutral, managed futures, long-short equity, currency and bear market.

Alternative-themed mutual funds saw inflows of $19.7 billion in 2012, while Morningstar estimates that among funds in its database, $7.6 billion flowed out of single-strategy hedge funds.

Among the five alternative categories attracting inflows, nontraditional-bond mutual funds have gathered the most assets, though long-short equity and multi-alternative strategies are also gaining momentum.

Fund firms with products in the managed-futures and multi-alternative mutual fund categories launched 22 and 17 new funds, respectively, in 2012.

Alternative ETFs have received net inflows of $41 billion since 2010, according to Morningstar.

Advisors clearly want income-producing alternatives, the research firm point out, and advisors ranked private real estate as their top strategy when planning future investments in alternatives for clients.

In addition, master limited partnerships (MLPs) drove significant portfolio growth over the last five years, advisors said. Also, in response to investors’ search for income, funds in the nontraditional bond category experienced 2012 inflows of $5.9 billion.

Managed futures, however, have seen their appeal drops among advisors and their clients. Though commodities are the most popular alternative ETF category, advisors moved away from managed futures in 2012  after citing them as their top pick in the two previous surveys.

Performance may have been a factor, as managed-futures ETFs and managed-futures mutual funds lost 15.6% and 7.4%, respectively, in 2012, where were levels similar to losses reported for these groups in 2011.

The survey also found that advisors and institutions are unhappy with the undisclosed performance fees that managed-futures funds frequently charge.

Long-short equity strategies, however, are among the most widely used, with inflows of $6.1 billion in 2012.

For the second year in a row, institutions ranked these strategies as their top choice for increased allocation; the strategy ranked second for advisors. While 61% of institutions said they accessed long-short strategies via hedge funds in 2010, only 26% indicated that they used hedge funds for that strategy in 2012.

More than 45% of institutions said they access long-short strategies via mutual funds in 2012 versus 38% in 2010. In addition, institutions are considering primarily long-short equity (and private equity) for increased allocation over the next five years.


For direct insights on the role of ETFs in client portfolios from multiple experts — including Rick Ferri, Ron Delegge, Skip Schweiss and more — we invite you to register for ThinkAdvisor’s premiere advisorcentric Virtual ETF Summit, which starts July 23 (and get multiple hours of CFP Board CE).


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