Morningstar says 78% of investment advisors allocate 25% or more of their managed portfolios into alternative investments. In 2010 only a third of investment advisors positioned client portfolios this way. Interest rates at all-time lows have forced investors and those planning for retirement to look further afield for high yielding investment returns, which cannot be generated safely from mainstream assets.
Public Pensions Big Players in Alternatives
The Morningstar research embraced non-traditional asset classes, including land, precious metals and private equity. A particular change in the market has been the arrival of public pension funds as major players. In May 2013 the New Jersey Pension Fund announced the allocation of $800 million of its $75.3 billion to alternative investment funds. Similarly, North Carolina’s State Treasurer wants the state to increase allocation in alternatives from 34% to 40%, citing being overweight in “publicly traded stocks, which is a problem given the danger of large equity market declines.”
“Diversification is not as difficult or complex as many people believe”
Everbank conducted a survey in May 2013 across 300 US investors, which showed that 52% were looking at alternatives outside equity and bond markets in search of higher yields. Of those surveyed: 21% were bullish on international equities, 7% on currencies, and 3% on international fixed income.
“The reality is diversification is not as difficult or complex as many people believe, and we're seeing a growing awareness of the importance of building investment portfolios that include traditional U.S. equities, traditional fixed-income assets and a wide range of more non-traditional investment vehicles,” Frank Trotter, president of EverBank Direct, said in a statement.
Hedging Against Inflation
CMG Capital Management Group founder and CEO Steve Blumenthal said “What we’re seeing is that the alternative portions of [portfolios] are doing great.” He suggest equities, fixed-income and alternative investments should be allocated at 33%, 33% and 34% respectively, rather than the typically predominance of traditional asset classes.
Anton Bayer, CEO of Up Capital Management says most investors currently have too little diversification in their portfolios (between small, mid and large-capitalization public companies, bonds and funds), and so they are currently highly correlated to financial markets. This makes them vulnerable to inflation, and if it rises and markets tumble, then private investments are “floating down the river at the same speed … You have to take a different model of diversification. What we have done over the last five years is added sector funds, isolated to particular industries’ financials, like energy, and combined that with asset allocation funds that are risk-based.” Bayer also advocates the potential of real estate investments and utilities, and recommends that his clients have a 5% allocation in such asset classes.
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