Morningstar Advisor - December/January 2010 - 36

Spotlight After Meltdown, More Advisors Turn to Alternatives By Laura Fox But a Morningstar survey finds that most say clients want to take a conservative approach. Given a year to reflect on the performance of their clients’ portfolios during the financial crisis, advisors are set to increasingly use alternative investments as part of their investment arsenals, according to a new Morningstar survey. Fifty-eight percent of 300 advisors surveyed predict that alternative investments will become as important as or more important than traditional investments in the next five years. In 2007, before the market downturn, only 33% held that opinion. have most of their clients in alternatives, according to the survey. In addition, 54% of advisors now anticipate that alternatives annually will drive more than 10% of their assets under management in the next five years; only 44% thought they would in 2007. Alternatives, Redefined “Some advisors may have mistaken REITs as providing stable income, such as monthly rent allotments,” she says. “But REITs act more like stocks and are even part of the S&P 500. In 2008, most REITs declined more rapidly than the overall market.” Contacted after taking the survey, David Kruis, of CrossPlan Money Management in Seminole, Fla., says that capital-protected and structured notes had fueled much of his alternative asset growth in the past five years. Recent events have caused him to reallocate his clients’ portfolios. “With rising interest rates, capital protected notes have lost some of their attraction,” he says. “Instead, I’ve used more annuities for my clients this year.” Best of Both Worlds The fourth-annual Morningstar Alternative Investment Survey asked financial advisors in September to evaluate their use of alternatives, and it’s clear from the results that the 2008 crisis has affected advisors’ perception of alternative asset classes. “Last year tested ideas of diversification and correlation,” says Scott Burns, director of ETF analysis at Morningstar. “Many investors thought that they were in alternative asset classes but really weren’t.” Consistent with past surveys, hedge funds, private equity, and managed futures top advisors’ lists when asked to define alternative investments. But advisors are losing confidence in the diversification effects of emergingmarkets stocks and bonds, capital-protected notes, and especially REITs. Sixty-six percent of advisors say they do not consider REITs an alternative investment, up from 55% in 2008. Nadia Papagiannis, an alternative investment strategist at Morningstar, is not surprised. In the next five years, to what extent will alternatives become as important as traditional investments? 2009 2007 Much more important Somewhat more important As important Somewhat less important Much less important 11% 13% 34% 28% 14% 4% 9% 20% 34% 33% Although advisors are using more alternative investments, they’re taking a conservative approach, the survey shows. Advisors note that their clients want the low correlations and absolute returns associated with alternative investments, but with a caveat—they must have low fees, liquidity, and transparency. “Advisors and investors want the best of both worlds,” says Steve Deutsch, director of separate accounts and collective investment trusts at Morningstar, who ran the survey. This confidence in alternatives is reflected in how advisors invest their clients’ assets and their growth expectations. In 2007, only 18% of advisors said that they had more than half of their clients invested in some form of alternatives; in 2009, 48% said that they 36 Morningstar Advisor December/January 2010

Morningstar Advisor - December/January 2010

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