Morningstar Advisor - June/July 2013 - (Page 7)
Letter From the Editor
Diversify Me
Jerry Kerns
Follow Jerry on Twitter
@ jerrykerns
Many investors are buying into the alternatives
story—that in today’s market they need more
than traditional stocks and bonds in their
portfolios to guard against downside risk—but
are they receiving the diversification benefits
they think they’re getting?
Morningstar’s Michael Coop thinks investors
often are not. In his Spotlight article, “Beware
the Lure of Diversification,” Page 36, Coop,
the head of alternative investments with
Ibbotson Associates Australia, says that
investors often overpay for alternative assets
that behave too much like equities and
fixed income. Just because an investment is
being marketed by the industry as alternative
doesn’t mean it will magically diversify a
stocks-and-bonds portfolio. Coop focuses on
two elements: the drivers of returns and
valuation. He says that investors first need to
take the time to understand the market
elements and conditions that affect the returns
of stock and bonds and then find alternative
investments that behave differently. After
all, the true test of an alternative investment is
whether adding it to a traditional portfolio
improves the portfolio’s risk-adjusted returns,
not hurts returns. In his article, Coop runs
a study to find the types of alternatives that are
truly the best diversifiers. But then, Coop
says, investors need to be mindful of valuation
and the amount of capital competing for
these opportunities. No matter what the drivers
of returns are, large losses are more likely
to follow surges in asset prices, creating more
risk for the portfolio.
I interviewed the members of one panel, which
will be moderated by Nadia Papagiannis,
Morningstar’s director of alternative funds
research, to get an inside view of this
burgeoning segment of the industry. Bradley
Alford, Richard Raby, and Richard Bregman
have many decades of experience researching
alternative investments and managers
for clients, and they share their vast experience
(“Using Alternatives in Practice,” Page 40).
For our 10 Questions feature (“Sophisticated
Strategies for the Masses,” Page 16), I also
interviewed Henry Davis, a member of the
second alternative-investing panel, which also
will be moderated by Papagiannis. Davis’
firm, Arden Asset Management, runs hedge
funds of funds, and his firm recently launched a
mutual fund that invests in hedge fund
strategies. He discusses the convergence
of the mutual fund and hedge fund worlds and
why he believes it will benefit investors.
Many alternative strategies were once only
accessible to the very wealthy. For better
or worse, these investments are being packaged as open-end mutual funds and exchangetraded funds. They are more accessible
but not less sophisticated. As advisors, you
have a huge role in guiding clients to the most
appropriate alternative investments. You
are the link to help clients figure out whether
they are truly getting the diversification
benefits promised by alternatives. I hope the
articles in this issue help you with this job. If
you have any feedback, let me know via Twitter.
Two panels at this year’s Morningstar
Investment Conference in June will be devoted
to alternative investing and its growth in the
advisor and individual-investor markets.
MorningstarAdvisor.com
7
http://www.MorningstarAdvisor.com
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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