In recent months the demand for alternatives has waned somewhat. Analysis suggests clients and, indeed, advisors are increasingly looking to the stock market for safe haven. Good move?
WealthManagement.com’s 2014 Advisor Benchmarking RIA Trend Report
suggests that advisors have become disillusioned by the poor performance of alternatives compared to indices such as the S&P 500.
The October report, which surveyed 400 RIAs with client assets of more than $25 million, had three particularly interesting findings: 1) Less advisors recommended alternatives to clients this year – 70% compared to 75%; 2) The number of advisors unlikely to recommend alternatives went from 17% in 2013 to 24% in 2014; and 3) Only 23% of those advisors not using alternatives planned to consider them for clients in 2014, down three percentage points from 2013.
The report states, “This apparent shift in in advisors’ inclination to recommend alternatives may be indicative of generally lagging performance, increasingly complicated strategies, high costs, or some combination of these and other factors”
Over the last five years alternatives have lagged equities delivering an annualized return of 3.9% compared to 16% for the S&P 500. While it’s understandable that advisors are frustrated by the lack of performance, alternatives aren’t meant to correlate with stocks. They’re meant to provide performance when stocks don’t.
According to Investopedia contributor Andrew Osterland, all seven alt fund categories outperformed
the S&P 500 in 2008, when the index lost 38%. That’s the last time the index went negative and not surprisingly, the last time alt funds did anything to write home about.
Unless you feel the bull market can continue unabated for another 2-3 years, it seems reckless to not consider non-correlating assets at this point in the cycle. Dr. Edward Yardeni produced a report
December 20 that points out the Bull/Bear ratio
hasn’t been over 3.0 (three times as many advisors are bullish as bearish) for such an extended period since 1987.
We all know what happened that year.
With the Dow much higher than where it was in 1987, it’s unlikely we’d have such a huge one-day correction (508 point, 23% decline), but it’s important to point out, nonetheless.
Alternative investments are meant for markets such as the one we currently find ourselves. Advisors might want to think twice before abandoning them.