Alternative investments have long offered investors opportunities to diversify and generate alpha they can’t find in traditional stocks and bonds. But they also require advisors to perform due diligence to determine which alternatives fit clients’ investment and risk profile.
More investors have begun pushing advisors to look for different attractive opportunities, especially after 2022, when both the stock and bond markets dipped, three RIAs with experience in the field said yesterday during “Inside Alternatives Asset Allocation: A Look At Expanding The Investment Toolbox,” a virtual conference co-sponsored by Financial Advisor magazine and Money Show.
Matt Andrulot, managing director of Verdence/OCIO; Michelle Connell, president and owner of Portia Capital Management; and Meghan Pinchuk, chief investment officer, Morton Wealth, all called the perfect storm of 2022 a reckoning for advisors, many of whom previously had steered clear of alternative investments.
“A lot of groups who we speak to who previously weren’t inclined to use alternatives because they didn’t have to for so many years realized there was a real need for them. You have to find some other source of returns beyond the traditional asset classes because there could be periods of time where you’re really not getting anything out of those asset classes,” the veteran COO said.
The panel’s moderator, Financial Advisor Magazine Editor Evan Simonoff, said he’s heard from advisors who said “they could deal with one year like 2022, but if there were two years like that, they’d probably start getting more blowback. When people get a 20% to 25% correction in stocks, they can accept it. When they get hit with that in bonds too, it gets a little more difficult.”
Connell agreed. “We can’t keep having years like 2022 and say, ‘well, the market’s down.’ If you look at statistics, over time, alts will take you up and to the left on your return-risk chart. And frankly, that has really helped my clients in down years,” she added.
Andrulot said alts also help advisors differentiate themselves. “There are lots of folks who are still long-only asset allocators, which is still a great business to be in,” he said. “But as the public markets are shinking, with fewer IPOs, less equities and private credit becoming a much bigger concern, I think advisors are now being driven by clients to look at alts to add value to overall portfolios.”
Simonoff asked the money managers what their current take is on real estate investment trusts (REITs).
“I know some advisors who use publicly traded REITs and REIT ETFs and have done well. If you look in the broker-dealer world, however, others have seen mixed results with packaged products. What are your thoughts?” Simonoff asked.
For REITs, “we tend to prefer smaller private managers who we can get to know and research and understand, so you understand what you’re getting and holding. That holds true for both interval funds and REITs,” Pinchuk said.
Connell said advisors should beware of looking at REITs as a way to diversify. “That has not worked, especially recently,” she said. “I look at alternatives as a way to not only enhance returns but minimize downside and clients really appreciate that.”
Simonoff asked the managers if they prefer liquid or illiquid investments.
“The issue is, is this investment structured properly? There are a lot of vehicles out there today where there is big mismatch between the liquidity they’re offering and what the actual, underlying assets are. In good times, some of those assets are really liquid. You’ve got private credit space loans paying off. You can sell your real estate no problem and then if markets change, liquidity can drop pretty quick,” Pinchuk said.
“You really want to make sure that if the environment becomes less liquid “they’re not forced to fire sale assets, or do something that is not in investors’ best interests just to meet liquidity demands or pay out investors,” she added.
Advisors also have to zero in on what is appropriate for clients, Pinchuk said. “Liquidity getting locked up is not evil, as long as it’s the right side of your portfolio and you were expecting it up front and it’s not a shock,” she said. “Most clients can handle that as long as you spend time on upfront education.”
Interval funds, a type of closed-end fund where the fund periodically offers to buy back a percentage of outstanding shares at net asset value (NAV), “are a nice way to start with clients,” Connell said. “They’re a little bit of a smoother ride and you can custody them where ever you’re doing business and clients can see them.”
Andrulot said interval funds can be a good choice for clients who need liquidity or may look to sell at times that aren’t ideal.
“Education around this stuff is so important,” he said. “In some ways, interval funds are great, because as an advisor you can push a button and buy it, you don’t need to go through a subscription agreement. But you’re also not getting the client to sign off, so theoretically, you’re not required to have some of these upfront conversations. But I think that’s dangerous because we’ve seen some of these interval funds negated because of liquidity.”
