Morningstar Advisor - December/January 2010 - 7

Letter from the Editor No Alternative But to Diversify So-called alternative investments are getting a boost nowadays from investors scrambling to figure out what went wrong in their portfolios in 2008. Many investors who thought they were properly diversified actually weren’t, and they took it on the chin hard. It was a wake-up call, and the rush to find strategies and investment vehicles that promise to offer truer diversification than mainstays such as emerging markets, commodities, and REITs is on. In this issue, we examine alternative investments to help you determine which offerings are overpriced gimmicks and which ones deserve a serious look. It can be a complicated, but rewarding, process, and our series of articles will guide you through it. First, Nadia Papagiannis, Morningstar’s alternative investments specialist, defines what an alternative investment should accomplish (number one: make money) and examines how quickly a wide range of alternative strategies have become accessible to individual investors (“Alternative Investments Go Mainstream,” Page 32). She generally finds that this increased supply is a good thing and argues that there’s a place in your clients’ portfolios for an investment that provides a positive risk-adjusted return and low correlation to traditional stock and bond investments. Next, we discover how much the financial crisis changed advisors’ view of alternative investments (“After Meltdown, More Advisors Turn to Alternatives,” Page 36). Every year, Morningstar surveys advisors about their use of alternative investments. More than half of respondents to the 2009 survey say that alternatives will become as important in their practice as stocks and bonds in the next five years. In 2007, only one third of advisors had that opinion. For advisors who have determined what strategy they want to execute, mutual fund analyst Jonathan Rahbar digs into Morningstar’s alternative categories to find good mutual funds and ETFs that offer easy access (“Where to Find Low Correlation,” Page 38). But what happens to a strategy if access is too easy? Contributing editor Paul Justice, an ETF strategist with Morningstar, details how the popularity of commodities— thanks largely to a proliferation of ETFs—is making the asset class more correlated with the stock market (“Commodities a Rock in a Hard Place,” Page 40). Finally, in Morningstar Conversation, Papagiannis talks with two esteemed investors who have been involved in the hedge-fund industry for more than decade, Cliff Asness and Andrew Lo (“How Alternatives Protect Portfolios,” Page 42). Both have recently launched retail mutual funds, and they have interesting insights on how advisors can improve the diversification in their clients’ portfolios. There’s more to this issue than alternative investing, of course. As target-date funds are becoming the favored choice of many 401(k) participants, Morningstar is stepping up its research and analysis of the products. In September, the company released a study that is the foundation of new reports that rate individual target-date series. Laura Pavlenko Lutton, who co-wrote the report, writes that investors can tell a lot about the quality of target-date funds by judging the people who run them (“This Time It’s Personal,” Page 26). And contributing editor Dan Culloton uncovers Kalmar Investments—a small firm in Wilmington, Del., that manages smallgrowth offerings and takes its inspiration from a pre-colonial merchant ship (“Shipshape,” Page 48). As always, please e-mail your feedback and suggestions to magazine_editor@morningstar.com. Jerry Kerns MorningstarAdvisor.com

http://www.MorningstarAdvisor.com

Morningstar Advisor - December/January 2010

Table of Contents for the Digital Edition of Morningstar Advisor - December/January 2010