Morningstar Advisor - June/July 2013 - (Page 10)
On Topic
How Do You Use Alternatives for Clients?
Let us know your thoughts at magazine_editor@morningstar.com
We use alternative strategies for clients.
We are looking for more-effective diversification in portfolios because of the increasing
correlation of asset classes in downturns.
Fiscal problems in the United
States are not likely to be solved
by the political class until a
crisis, so protecting clients against black
swan events is critical.
Donald Roy, CFP
New England Wealth Advisors
Merrimack, NH
How do you define “alternatives”? Is there such
a thing as “traditional”? I suspect the question
is meant to be simple, but in my view, absent
a clear definition, the answer is akin to
answering the query, “What is art?” I know it
when I see it. I would say that non-traded
REITs and business development
corporations are alternatives, and
I use them to diversify my clients’ portfolios.
Perhaps up to 10% of wealth managed for
certain clients finds its way into “alternatives.”
James Hallett, CFP
Hallett Advisors
Port Angeles, WA
We are always looking for places to put our
clients’ money when we take money out of the
stock market. Increasingly, we are nervous
allocating that money to bonds. We look for
Alternative investments are currently only
about 10% to 15% of my clients’ allocation.
I primarily use alternatives
as noncorrelated alpha rather
than a hedge or to counter equity or fixedincome movements.
Quick Poll (given May 2, 330 responses)
1 In your typical client’s portfolio, how much
is allocated to alternative investments?
We use alternatives in our client portfolios
for one main reason: to increase
their risk-adjusted investment
performance. Whether we are
using a long/short manager, global macro,
or MLPs, we look first to the degree that these
managers correlate with more-traditional
assets for a client. We then think about how
that manager might behave in the future
and if we think their alpha-drivers will be
sustainable. With the low yields in high-quality
fixed income today (a traditional volatility
reducer), we continue our allocation of 20%
to 25% to alternatives to help our clients
meet their goals without over-allocating them
to equity assets.
Jonathan R. Kelley, CFP
Hinds Financial Group
Lakewood, CO
51.7%
11% to 15%
Prakash Subramaniam
Regent Financial Services, part of LPL Financial
Tulsa, OK
10%
24.9%
16% to 20%
11.2%
20%
12.2%
2 What is the main role alternatives should play
in a portfolio?
Diversification
60.8%
Risk-adjusted return
18.8%
Absolute return
10.4%
Hedging
10.0%
3 Have you increased or decreased your clients’
allocations to alternative investments since
the 2008 financial crisis?
Increased
67.0%
Decreased
4.5%
No change
28.5%
4 More and more alternative strategies are
becoming available in open-end mutual funds.
How do you view this development?
Positively. My clients should have access
to sophisticated alternative strategies.
Negatively. My clients do not need
sophisticated alternative strategies.
No opinion
70.3%
9.7%
20.0%
5 What concerns you the most about investing
in alternative investments?
low-volatility, absolute-return
strategies that are not correlated
to the stock or bond markets for a
Complexity
23.9%
Transparency
23.3%
Costs
21.2%
risk-off allocation.
Performance
19.3%
Liquidity
12.3%
Anthony Pace, CFP
Lindberg & Ripple
Windsor, CT
10 Morningstar Advisor June/July 2013
Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2013
Morningstar Advisor - June/July 2013
Contents
Contributors
Letter From the Editor
Not Your Values
How Do You Use Alternatives for Clients?
Working to Build a Niche
How to Put Buffett’s Investing Philosophy into Practice
Sophisticated Strategies for the Masses
Investments á la Carte
Investment Briefs
The Percentile Trap
Defense Firms Will Stay Aloft
Beware the Lure of Diversification
Using Alternatives in Practice
Managed Futures and Cash Rates
The World Is Getting Grayer
Waiting to Pull Up Anchor
The Price of Managing Volatility
Let’s Get Back to Basics
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Mutual Fund Urban Myths
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