Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > Mutual Funds > Equity Funds

3 Alt Investments That Deserve an Oscar: Morningstar

Your article was successfully shared with the contacts you provided.

Love them or hate them, some funds — much like critically acclaimed film characters — keep investors at the edge of their seats.

Morningstar’s Josh Charlson compares a few top-performing funds to movies in a recent online report.

The head of alternative funds research acknowledges that with returns of nearly 14% and 6%, respectively, last year, S&P 500 and the Barclays U.S. Aggregate Bond Index may have stolen the spotlight from funds focused on other investments.

But Charlson feels that investors and advisors should take a look at three areas of funds that could produce excitement this year, based on their 2014 results.

“Keep in mind that great performances aren’t always uplifting — recall that Anthony Hopkins won Best Actor for playing Hannibal Lecter,” explained the CFA. “There weren’t too many 2014 alts performances quite that terrifying, but investors in some strategies definitely had a bumpy ride.”

Keep reading for the three fund categories Charlson says are primed for Oscar-worthy performances this year:

Bradley Cooper starring in American Sniper. Photo: Warner Bros. Pictures

‘American Sniper’ (aka Dollar Dominator)

Comparing the U.S. dollar to the lone gunman, Charlson says the currency stands on its own among currencies recently.

“While major currencies across the globe faced challenges — from central bank stimulus in Japan, to economic struggles and European Central Bank easing in the eurozone, to commodity-export weakness in the Australian and Canadian markets — the U.S. economy continued to find solid footing as one of the few sources of growth worldwide,” he explained.

In 2015, it could benefit further thanks to the Federal Reserve’s plan to raise interest rates.

Still, many multi-currency funds had a bad 2014, chiefly because they short the U.S. dollar.

Overall, the category lost an average of 1.64% on average last year.

Hard-currency funds, such as the Silver-rated Templeton Hard Currency (ICPHX) and Merk Hard Currency (MERKX) had rough 12-month experiences, though more flexible absolute-currency funds, like the John Hancock Absolute Return Currency (JCUAX) — had more long-dollar exposure and ended the year with a 1.26% return.

In the near term, the Morningstar analysts says he agrees with Bill Gross of Janus: The U.S. remains the global markets’ “cleanest dirty shirt,” and dollar strength should continue.

Reese Witherspoon starring in Wild. (Photo: Fox Searchlight Pictures)

‘Wild’ (aka Managed Futures)

In “Wild,” the main character goes hiking on the Pacific Crest Trail to rediscover herself.

In Charlson’s view, managed-futures investors have been on “a similar trek through the wilderness …, enduring the deprivation and humiliation of paltry (and often negative) returns since 2009.”

After the crash of 2008, many turned to these funds with high hopes only to see them dashed for a variety of reasons.

“But 2014 was an oasis in the desert for thirsty managed-futures travelers,” the Morningstar analyst said.

The managed-futures group outshone all other alternatives categories and returned nearly 9.1% in 2014. The downward pressure on commodity prices and the strength of the dollar helped boost results.

“Because managers in the category target a range of volatility levels, some of the more aggressive funds reached unusually high returns — the top five funds in the category all returned in excess of 20%,” he said.

The Silver-rated AQR Managed Futures Strategy (AQMIX) produced a 9.7% return, for instance, and “its high-volatility sibling (which targets 50% more volatility) produced a 14.7% result,” according to Charlson.

“If, as some expect, we are at the beginning of a higher-volatility regime in the markets, managed-futures funds may continue to show their worth, but investors would be wise to not forget too quickly the previous half-decade’s futility,” he cautioned.

Miles Teller and J.K. Simmons starring in Whiplash. (Photo: Sony Pictures Classics)

‘Whiplash’ (aka Long-Short Equity)

The film “Whiplash” focuses on a young drummer who gets whipped around by an overly demanding instructor.

Investors with long-short equity funds have experienced similar trauma: After seeing average returns of 14.6% in 2013, their performance was just 2.92% in 2014. That’s about one-fifth of the S&P 500’s 2014 return.

Driving the rocky results, Charlson says, was long-short funds’ exposure to small-caps and foreign stocks.

Still, the group’s results don’t look so awful when compared to the Russell 3000 Equal Weight Index’s 5.45% movement in 2014, he notes.

Plus, some long-short funds did well. Top performers include the Highland Long/Short Healthcare Fund (HHCAX) and the AQR Long-Short Equity Fund (QLENX), which returned 14% or higher.

In addition, two of Morningstar’s Alternatives Fund Manager of the Year candidates saw better-than-average gains: Gotham Absolute Return (GARIX), which improved 9.3%, and winner Boston Partners Long/Short Equity (BPLSX), which moved up 4.7%.

Nonetheless, it’s hard for advisors and investors to endure losses when the markets are improving.

One fund that really caused some pain, the Morningstar analyst points out, was MainStay Marketfield (MFLDX). The fund has amassed a good amount of assets, “making it the largest fund in the liquid alternatives universe,” he says.

In 2014, though, it lost 12% and has a five-year average return of -0.96%.

“Manager Michael Aronstein is certainly capable of turning things around quickly, but there’s a cautionary lesson here,” Charlson noted.

— Related on ThinkAdvisor:


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.