Morningstar Advisor - December/January 2010 - 35

The magazine of investing insights for independent-minded advisors February/March 2009 Morningstar Advisor February/March 2009 Alternatives Give a Boost Replacing 20% of a traditional portfolio’s equity position with an alternative strategy improves the portfolio’s returns. Effect of 20% Alternatives Allocation Inception Date 1-Yr Return 3-Yr Return 6-Yr Return 1-Yr Sortino Ratio 3-Yr Sortino Ratio 6-Yr Sortino Ratio 60/40 Traditional Portfolio Hedged Equity Portfolio Market-Neutral Portfolio Managed Futures Portfolio* 10/1/2003 10/1/2003 10/1/2003 4/1/2007 0.85 1.14 8.68 3.94 –0.65 0.92 4.16 — 3.69 4.20 4.52 — 0.05 0.05 0.57 0.15 –0.07 –0.05 0.14 — Mandelbrot, Cooper, and Ibbotson Financial Crisis 0.05 0.09 0.19 — *Futures-trading funds are new offerings. The inception date of Rydex/SGI Managed Futures Strategy was March 2, 2007. Alternative funds do tend to have higher available in a multitude of easy-to-access vehicles, and they certainly aren’t too expenses than do most diversified equity risky, at least not more so than traditional mutual funds. The average long-short mutual portfolios. When added to a traditional fund’s expense ratio is about 2%. But portfolio, alternatives can lower the portfolio’s there are less-expensive options. JP Morgan overall risk profile. In fact, blowup risk, Market Neutral Institutional and Hussman which plagues hedge funds and private equity Strategic Growth have expense ratios of just funds, is virtually nonexistent in today’s more than 1%, on par with the standard regulated structures, which restricts illiquidity large-cap mutual fund. Rydex/SGI Managed The magazine of investing insights for independent-minded advisors Summer 2008 The Bet Is Risk and leverage. And although many alternativebeOnly Safe by the recent meltdown is to ignore the volatile history of capital markets. Futures Strategy is pricier at 1.75%, but To surprised investments can be expensive, there are cheap it has provided real bang for the buck over the options out there. past year. There is also a newer, cheaper commodity futures-trading ETN, the Elements Because of the plethora of choices, however, S&P CTI ETN LSC, at the lower price of 0.75%. advisors must carefully sift through the To Invest or Not to Invest possibilities, understanding the different types Advisors know well that diversification is the of alternative investments, how they work, cornerstone of portfolio management. and how they match clients’ needs. In the end, In 2008, however, many advisors found that there’s not much to dislike about alternatives diversification failed—not because the and no reason for advisors to keep them out of theory was wrong, but because the investthe portfolio mix. K ments they used were more correlated to the Nadia Papagiannis, CFA, is an alternative investments markets than they thought. MorningstarAdvisor.com Greenspring Rather than standing pat, hoping that one day their clients might recover from huge losses in time to retire (or before another crash occurs), advisors should consider incorporating true alternative investments into their clients’ portfolios. Alternatives can do a much better job of diversification than the typical stock/bond mix. Although their strategies are sophisticated, alternative investments are no longer out of reach for mainstream investors. They are Sequoia Big Banks Morningstar Advisor Summer 2008 Morningstar Advisor magazine Free. Don’t miss an issue! Subscribe today! Call 888 235-0828 or visit MorningstarAdvisor.com College Planning strategist with Morningstar. MorningstarAdvisor.com 35

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Morningstar Advisor - December/January 2010

Table of Contents for the Digital Edition of Morningstar Advisor - December/January 2010