Alternative funds were a big theme at this week's Morningstar convention in Chicago, with the accent on smart beta and other strategies designed to increase return and reduce risk to stock investors. The adviser's biggest problem: Choosing among so many.
The focus on alts and smart beta makes sense: Investors have poured nearly $7 billion into alts the past 12 months, while
yanking $186 billion from U.S. stock funds. Clearly, they're still leery of the stock market, but eager to boost returns in a near-zero interest rate environment.
To Vanguard's Joel Dickson, global head of investment research and development, smart beta is best seen as active management 2.0. “It's about how to take active risk in a rules-based way at low cost,” Mr. Dickson said. “Gaining access to active strategies at low cost is fairly beneficial.”
Vanguard is using a number of alternative strategies in its managed payout fund, which aims to distribute 4% annually to shareholders. The fund has about 16% of its assets in alternatives, such as a global minimum volatility fund and an alternative strategies fund.
Vanguard, despite its staunch backing of index funds based on market capitalization, remains “interested in factor-based exposure,” said John Ameriks, head of Vanguard Quantitative Equity Group. Vanguard has several factor-based ETFs on sale in the U.K., including a global value factor ETF and a global minimum volatility ETF.
Alternative strategies were also a topic at a well-attended (and surprisingly low-key) discussion between
Rob Arnott of Research Associates and Cliff Asness of AQI Capital. One nugget from the discussion: Low-volatility stocks are expensive historically, and that could indicate subpar performance going forward.
And alternative fund companies were out in force at the convention hall, with booths run by everyone from Absolute Investment Advisors to the WBI funds. One problem for advisers trying to sort them all out: Many alternative funds don't have particularly good records. The average long-short equity fund, for example, has gained an average 1.8% a year the past three years, vs. 8.54% a year for the average large-cap blend fund. The average market neutral fund has gained 1.01% a year — less than the average intermediate-term bond fund.
Making matters more difficult for advisers is the wide dispersion of outcomes among alternative funds. Within the market neutral category, for example, the top two funds are
BlackRock Event Driven Equity (BALPX), up 8.22% the past three years, and Cognios Market Neutral Large Cap (COGMX), up 7.03% annually. On the other side of the ledger are Hussman Strategic Growth (HSGFX), down 7.06% a year the past three years, and
PIMCO RAE Worldwide Fundamental Advantage PLUS (PWWCX), down 3.83% a year.
To find a truly good alternative fund, you'll need more than a free set of golf balls at the exhibition hall.
