Morningstar - Q1 2023 - 62

Investors
positive returns. A lot of the other alts are
either positive or barely negative.
drivers of fixed income and the drivers of
equity. Is there a way for us to diversify away from
that? That's where we turn to alternatives.
Alts have redeemed themselves as diversifiers.
In other down markets, plain old short-term
bond funds had done a better job than alts,
for a smaller fee. But this time, a lot of
the alt strategies have actually done a nice job,
suggesting that they might be a good
part of the portfolio to diversify beyond your
traditional stocks and bonds.
Lauricella: Marta, how do you see alts in the context
of portfolio strategy?
Norton: With anything that you own in
a portfolio, you should have a fundamental
rationale for owning it. You should know
what role it's going to play-at a most basic
level, whether it's for capital appreciation
or capital preservation.
We have some advantage with alts because
we've been using alts strategies for so
long. I was with the team when we made it
through the global financial crisis, and I remember
being disappointed with a lot of alts managers.
They had made these tremendous promises,
especially long-short funds, that they could
somehow have the upside but still mitigate the
downside. And a lot of them disappointed.
Some did OK but certainly not as well as investors
hoped. The results were roughly in line
with what you would get from a conservative
asset-allocation portfolio.
So, we spent a few years thinking through,
what are we really trying to get with alts? There's
a lot of different stripes. You have alts that
are almost equitylike in terms of the volatility and
risk that they take on, but are diversifiers,
like some commodity and managed futures
strategies. Other alts are trying to be
very defensive and diversify away from rate
and equity risk.
From a portfolio-context perspective, if we want
big returns, we're going to turn to the equity
market. We're not going to play around with an
unpredictable managed futures strategy. But
back to the point I made at the start of the
conversation, there is some overlap between the
62
Morningstar Q1 2023
We're very purposeful. We have three managers
in our alt strategy. We've known them for a very
long time. They charge lower fees than what
you typically see in alts. They have a predictability
to their returns. They have a fundamental
case behind what they're trying to achieve that's
something that we can understand.
The cost to them is that we give up a lot of
upside. If you're in an environment like we were
in the 2010s, when monetary policy is very
accommodative and fixed income and equities are
a fine place to be, then alternatives are going
to be a bit of a disappointment. Just like life
insurance can be kind of a drag on your overall
financial picture-but when you need it,
it's there. That's how we looked at alts, and we
were really pleased with how they helped
our portfolios this past year. To Russ' point, our
alts fund outperformed our defensive bond
fund meaningfully over this stretch.
Durable Lessons
Lauricella: What's one final takeaway for investors
from this crazy 2022-the durable lesson?
Kinnel: One of the lessons is that these long-term
investments really need to be long term.
Even bond funds are not meant to be a place
where you put money for your kid going to
college next month. Diversification works, but
there are these storms that hit. It seems
like every few years, you get some downturns,
and the short term is incredibly hard to
predict. But the long-term economies and
markets are very resilient, and you will
likely be rewarded.
It's very important to have a realistic outlook for
both the upside and the downside of your
investments, so that you can make it through-
because the rallies can be just as violent and
surprising as the selloffs.
Caldwell: At the macro level, asset price
volatility is an order of magnitude larger than
volatility in the underlying fundamentals
across any kind of asset. Asset prices always
overreact, basically.
Also, it's remarkable to me how extreme and
wrong the narrative was early on in the
pandemic recovery, with talk of a new normal in
terms of relative sector performance. Tech
was going through the roof and energy was
getting hammered because, supposedly, nobody
was going to be driving to work anymore or
going to shop in stores. That goes to show you
that we should be skeptical of these grand
new narratives that come to dominate the market.
No matter how efficient the market is
at a micro level, at a macro level, it can still
be very inefficient.
Norton: I'm learning lessons all the time, but
the most durable lesson to me relates to
uncertainty and to holding convictions loosely.
We investors do a lot of analysis, and when
we come to a conclusion, it means something
to us. We put a little bit of our heart into
it, and we get married to it. This is behavioral
bias 101.
I think the best way to invest is pragmatically,
to be willing to take in new information as
it comes without losing your moorings or your
philosophy as you do it. Have a loose grip
on your convictions. Work hard to come to them
but be willing to change your mind. K
Tom Lauricella is chief markets editor for Morningstar.
Photography by Matthew Gilson.
https://www.morningstar.com/authors/1953/tom-lauricella

Morningstar - Q1 2023

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Contents
Morningstar - Q1 2023 - Cover1
Morningstar - Q1 2023 - Cover2
Morningstar - Q1 2023 - Contents
Morningstar - Q1 2023 - 2
Morningstar - Q1 2023 - 3
Morningstar - Q1 2023 - 4
Morningstar - Q1 2023 - 5
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Morningstar - Q1 2023 - Cover3
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