Morningstar Advisor - June/July 2013 - (Page 10)

On Topic How Do You Use Alternatives for Clients? Let us know your thoughts at 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
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

Morningstar Advisor - June/July 2013