The magic range for allocation to alternative strategies in a client's portfolio is somewhere between 10% to about 20%, according to a panel of experts at the InvestmentNews Retirement Income Summit.
A session at the conference in Chicago on Tuesday, “Alternative Investments: A retirement income lifeline,” covered the different ways advisers can use alternative investments as they prepare clients for retirement.
“Alternatives are in portfolios not necessarily for the years where you can make money sitting in the market,” noted moderator and InvestmentNews reporter Jeff Benjamin. “They're for volatile periods.”
During the first three months and two weeks of 2014, the S&P 500 Index was up 0.3%, but leveraged commodities were up 10.3% and leveraged debt was up 12%, according to Mr. Benjamin's presentation.
The role of alternatives in a client's portfolio is to create the third leg of the stool, “a truly independent leg that isn't correlated to the rest of the things in a portfolio,” noted panelist Dorothy Weaver, chief executive officer of Collins Capital Investments.
“You can raise returns by doing little things rather than staying stuck in the mud,” said panelist Michael T. Dieschbourg, managing director of alternatives and managed risk teams at Federated Investors. “Alternative strategies move based on where the opportunities are, and we have a chance to add a difference based on the outcome you're trying to achieve.”
Enter the benefits of using alternative mutual funds in a client's portfolio: There's access to hedge fund expertise with the ease of a mutual fund. There is also the fact that these funds use Form 1099 to report gains and losses instead of Schedule K-1.
Finally, alts within a mutual fund give clients peace of mind because of their liquidity, Ms. Weaver said. “Having lived through an environment where there is a great deal of uncertainty, the sleep-at-night factor is real,” she said.
Just how much should advisers allocate toward these strategies? Ms. Weaver noted that anything less than 10% won't move the needle much. Panelist Nadia Papagiannis, director of alternative investment strategy for global third party distribution at Goldman Sachs Asset Management, noted that 20% is “pretty standard.”
She noted that some of the ways for advisers to make alternatives a part of what they do would be to add a sleeve to a core portfolio, based on the outcome the client hopes to achieve.
“If your client has an income-oriented portfolio, you can add a fixed-income long-short strategy with a yield component to it, or a [master limited partnership] with a yield component to it or a [real estate investment trust] strategy,” Ms. Papagiannis said. “If you're more growth-oriented, you want more long-short equity — something that gives you more of a return aspect.”
Taking a new approach to portfolio diversification.