CHICAGO -- There are now more than 400 mutual funds using alternative strategies, and about the same number of ETFs, Nadia Papagiannis, Morningstar's director of alternative fund research, told advisors at the Morningstar Investment Conference.
That's up from only 10 such alternative funds in 2008, she added; only 4% of advisors responded to a 2012 survey saying they did not use alternatives in constructing client portfolios.
But amid that surge in investment products, some advisors appear interested in hearing the insights of experienced investors. And indeed, at a conference panel that Papagiannis moderated on the topic, the three speakers -- Brad Alford, founder of Alpha Capital Management, Richard Bregman, Founder of MJB Asset Management, and Richard Raby, portfolio manager for Creative Financial Group -- all had slightly different definitions of the alternative investments category. But they generally agreed it included any investment not consisting of stocks, bonds or cash; examples include managed futures, long-short funds and market neutral funds.
The main value of alternatives, the panelists said, was to get the clients to stay in the stock market during volatile times such as the stock market plunge of 2008 and 2009. The lower correlations with stocks can lessen the downside performance, reducing the risk that clients will panic.
Bregman said he typically uses alternatives for a third of a client's portfolio, while Raby uses a bit less at 20% to 25% -- although he noted it would be slightly higher if one considered non-traditional bonds an alternative investment, as Morningstar does.
Two of the panelists said they had shifted their strategy more recently. Although Raby said he has been using alternatives for clients for 13 years, he no longer uses the same vehicles. Bregman also said he now uses different funds than in the past. (And both said they no longer use managed futures, which performed so well in 2008.)
Not mentioned in the session, however, was the overall performance of alternative investments. Morningstar data through mid-2012 showed all seven of its categories of alternatives having negative or very low returns over the previous five years. Papagiannis told me Morningstar has not issued an updated performance report by category, but did say that she felt skilled managers could bring value to clients.
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