Traditional
portfolio management hasn't worked for the past decade, and advisers need to change their investment strategies, Steve Blumenthal, chief executive of Capital Management Group Inc., told advisers Tuesday during a panel discussion at the NAPFA conference in Chicago.
The firms of Mr. Blumenthal, along with David D'Amico, president of Braver Wealth Management LLC, and Michael McClary, director of investment advisor services at Valmark Securities Inc., offer alternative investing strategies that financial advisers can access through a tax-deferred annuity from Jefferson National Financial Corp.
Mr. Blumenthal suggested that advisers need to emulate — at least in part — the strategies of university endowment managers who increased their allocations to alternative assets dramatically over the past two decades. “Be like Wharton and Harvard,” he urged the audience. “Most advisers, in one form or another, are still 60/40 [stock/bonds allocation].”
Based on inputs including current
dividend yields and Treasury bond rates, Mr. Blumenthal said advisers could expect a 4.4% average annual return from a 60/40 investment model over the next decade. That would be the lowest ten-year return over the past 140 years. With fixed-income allocations being the “biggest bomb” in portfolios currently, he suggested advisers shift to a 33/33/33 model, with alternative-investment strategies making up a third of the allocation. His firm offers a tactical high-yield bond strategy that is a good alternative to Treasury bond allocations.
“We're expecting a choppy to sideways-moving market for some time to come. The alternative space is now available to most investors. You're in a position to offer more to your clients,” he said.
These aren't your grandfather's alternative investments — such as gold or real estate. All three panelists offer tactical investing strategies that have low correlations to stocks and bonds and place a premium on downside risk protection.
“Most of my career I've been a fully invested traditional manager,” Mr. D'Amico said. “But clients can't take the ups and downs anymore. You have to avoid major market corrections.” He showed numbers that confirm that it is far more important that investors miss the 10 worst days in the stock market every year than participate in the ten best days.
Mr. McClary uses ETFs on a tactical basis in a tax-deferred wrapper to reduce volatility and protect capital. “Our equity exposure may go from 85% down to 40% and back up pretty rapidly,” he said. “We're very reactive to the market.”
Mr. McClary said his use of futures contracts to hedge exposures allows him to avoid 75% of the downside on the S&P 500 while forgoing 25% of the upside.
Two advisers in the audience asked about the high costs of such tactical strategies. As Mr. D'Amico pointed out, the downside of these actively managed strategies are high turnover of investments, generation of short-term capital gains and high commission costs. He sets up the investments in tax-deferred vehicles when he can.
Mr. Blumenthal, whose firm charges 125 basis points on assets, said that advisers should expect to put more in the alternatives/tactical strategies bucket — and make the bucket bigger.
“According to Cerulli [Associates Inc.] data, the typical adviser has a 5% allocation to alternatives, and it's usually in gold or REITs. That's not enough,” Mr. Blumenthal said. “There are newer, better and lower-cost alternatives out there now. Enhanced modern portfolio theory, along the lines of the endowments, is a good idea.”
