What workers really think of their employers' health and retirement plans.
By Cyril Tuohy
Halt those alts?
While money continues to flow into alternative investments — “alts” — the value of those investments continues to lag at of a low-cost benchmark index fund. And in many cases, value is even draining from some alternative funds.
For advisors willing to hazard a guess, the numbers aren’t pretty.
Alternative mutual funds have gained 0.93 percent a year in each of the past three years, according to the national financial columnist John Waggoner.
Long/short stock funds have gained an average of 8.3 percent a year.
Multicurrency funds, which invest in international currencies, fell an average of 0.78 percent a year in the past three years.
Bear market funds have lost 26.7 percent a year over each of the past three years.
Multialternative funds, which invest in a mix of alternative funds, have gained just 3.03 percent a year, according to Lipper data.
And that’s before fees and commissions, which charge ten or 15 times per plain vanilla index fund, writes Waggoner in USA Today, citing Lipper data.
The Standard & Poor's 500 index, meanwhile, has gained nearly 20 percent a year over the past three years.
Proponents of alternative investments say they help diversify an investment portfolio beyond stocks, bonds and cash, and that advisors and investors need to consider alternatives as one piece of a larger investment strategy.
Alternative investments also offer some exposure to higher returns at a time when low interest rates mean meager yields in many retirement portfolios — so long as advisors and investors understand the risk.
Plenty of financial advisors are on record as questioning the wisdom of investing in alternative funds and strategies.
Advisors like Christopher Van Slyke, a founder of the advisory firm WorthPoint in Austin, Texas, tells The Wall Street Journal that so far there’s not an alternative fund out there in which he’d invest.
Other advisors say the big disparity in the performance of alternative funds leaves them nervous, and causes these advisors to steer clear.
And yet …
Total assets managed by the top 100 alternative investment managers rose to $3.3 trillion last year, from $3.1 trillion in 2012, according to the “Global Alternatives Survey” conducted in December and published last month by the global consultancy Towers Watson in conjunction with the Financial Times.
“For almost all of the past 11 years of this research we have seen increasing allocations to alternative assets by a wide range of investors,” Craig Baker, global chief investment officer at Towers Watson, said in a statement.
“Not only has the appeal of alternative assets broadened to include many more insurers and sovereign wealth funds, but the range of alternative assets has also increased beyond the likes of hedge funds and infrastructure to include real assets, illiquid credit and commodities.”
Even institutional investors such as pension funds, not known for taking undue risk, appear comfortable with alternative investments: commodities, futures, precious metal, commodities, venture funds and hedge funds.
Pension fund assets represent one-third of the top 100 alternative managers’ assets, followed by wealth managers (18 percent), insurance companies (9 percent), sovereign wealth funds (6 percent), banks (3 percent), funds of funds (3 percent), and endowments and foundations (3 percent), the Towers Watson research found.
“Most of the traditional alternative asset classes are no longer really viewed as alternatives, but just different ways of accessing long-term investment themes and risk premia,” Baker said.
Financial planner Roger Wohlner, a fee-only advisor in Arlington Heights, Ill., writing in The Chicago Financial Planner blog, says he’s “a fan of alternatives,” and that he’s used alternative mutual funds for several years.
Wohlner adds this caveat:
“Remember though, large endowments like those of the Ivy League schools use alternative investments extensively and successfully,” Wohlner writes. “Unlike you, they have access to the expertise needed to perform proper due diligence.”
A “risk alert” issued in January by the Securities and Exchange Commission’s Office of Compliance Inspections and Examination found that compared to earlier investment eras, advisors are looking for more “position-level transparency” about an alternative investment.
Advisors are also asking for and performing more quantitative analyses on alternatives than in the past, the SEC said.
Even so, not all alternative investment managers are equally generous with sharing their information with advisors. This could have the effect of watering down the due diligence required of the advisor, the SEC found.
That makes it harder for advisors and investors to know what they are investing in. “Does the financial advisor recommending these funds to you really understand them? Be sure that you do before investing in any alternative investment product,” Wohlner writes.
That’s often easier said than done.
In hindsight, it’s worth asking whether advisors and investors would have bet on multialternative funds again had advisors known these funds would post measly gains of 3.03 percent a year over the last three years.
Had they known, it’s likely they would have steered clear of alternatives.
Would they have stuck to alternatives if they also knew the Standard & Poor's 500 index would have returned nearly 20 percent a year in each of the last three years?
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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