The Importance of Education on Complimentary Diversifiers
A December Wall Street Journal headline titled” ‘Liquid –Alternative’ Mutual Funds Dealt Setback as Investors Flee” makes you wonder why clients need help from advisers.
The article details the woes of one large fund, Mainstay Marketfield, which shed over $13 billion in assets during the 2014 calendar year. Marketfield, a top performing long/short fund, has attracted assets over the last five years with incredible returns. This was due to the stock picking of their team. This fund, which according to Morningstar had volatility roughly .67 of the S&P, is the type of “liquid alt” that would be subject to double digit negative returns as their stock picking reverted to the mean. The problem here is not Marketfield, but clients who were sold this fund for what it is not.
Marketfield, like others in this category, should be looked at as a diversifying component to beta available in stocks and bonds. The entire “liquid alts” label should be adjusted so clients and their advisors begin to think about the role alternatives play in a portfolio. Most clients are looking for non-correlated investments to stocks. Low yielding fixed income and the potential tail risk in market downturns like in 2008. Though they should not expect from their Diversifier is equity like returns during periods of strong equity markets. Occasionally, when all goes right, trend followers and long/short vehicles may have returns that mimic or outperform in strong equity years. However, this is not the role of Diversifiers clients should expect.
What does this have to do with the WSJ article? First of all, the category is doing fine. Over $20 billion was estimated to be invested during 2014*. Secondly, the advisors who are pulling money from Mainstay Marketfield are to blame. Unrealistic expectations will always equal unhappy clients.
As a financial advisor it is our role to make sure clients understand why a particular strategy is being utilized. When advisors add or subtract a strategy they must ensure the overall portfolio retains its balance. Following a year where many “liquid alts” did their job, signaling out one long/short fund that up until now has outperformed, is exactly what investors and their advisors don’t need. As they try to assemble portfolios in the face of skyrocketing equity markets and historically low bond yields.
We suspect that much of the $13 billion that is being reallocated from Marketfield was sold based on the “wow” of the preceding years. We believe that by showing Diversifiers as a distinct piece of a portfolio with an essential role, advisors will begin to match expectations with potential benefits. The starting point is to educate advisors and their clients on how the selection and monitoring of the Diversifier universe may complement and enhance the overall portfolio.
*Morningstar monthly asset flow report
_________________________________________
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. FTJ FundChoice does not guarantee any minimum level of investment performance or success of any index portfolio or investment strategy. Past performance is not indicative of future results. Indices are unmanaged and their returns assume reinvestment of dividends and do not reflect any fees or expenses. It is not possible to invest directly in an index. Information obtained from third party sources are believed to be reliable but not guaranteed. FTJ FundChoice makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.