Morningstar Advisor - December/January 2010 - 37

Kruis agrees. He says that he chooses to invest assets in alternatives that have transparent investment policies and clear structures. “I follow the Warren Buffett example; I don’t invest in products that I don’t understand,” he says. “So, I tend to avoid the exotic alternative investments, like hedge funds. I just don’t have time to fully research them and explain them to my clients.” Gerald Thebeau, president of Thebeau-Kelly, Inc., in Creve Coeur, Mo., echoes Kruis’ comments. Illiquidity, complexity, and other pitfalls keep him from investing in any alternatives. “In order to invest in alternatives, I would need to see that they offer something better than traditional asset classes,” he says. “I need to have someone explain their benefits to me very carefully, and I would need to read some well-researched evidence of their success.” Like Thebeau, most advisors want more research, education, and performance-monitoring of alternatives. Seventy percent say that they’re more likely to invest in alternatives that have a frequent method of valuation. Most also want a third-party due-diligence report, liquidity guarantees, and portfolio transparency. funds that Morningstar tracks, 218 have been created since 2007. Advisors’ desire to take an indirect approach to investing in alternatives is a product of the current environment. Only 18% of advisors say that they gain direct access to alternative strategies, such as through commodities futures and currencies. In 2007, 42% of advisors made direct investments. If Everyone Is Doing It … What features would cause you to be more likely to invest in alternatives? Frequent method of valuation Third-party due-diligence report Liquidity guarantees Portfolio transparency 70% 60% 59% 50% Last year proved that “illiquidity magnifies the effect of negative surprises,” says Jeffrey Cahn, an advisor and the director of research for Securian Financial Services in St. Paul, Minn. Because advisors want more-conservative ways to take risks, mutual funds and exchangetraded funds are benefiting. More than 60% of advisors say that they are more likely to invest in alternative strategies if they are embedded within open-end mutual funds and ETFs. This demand has been met by an increasing supply of funds. Of the 339 total alternative As more and more investors use mainstream retail products to pursue alternative strategies, will these investments remain truly alternative? Morningstar’s Papagiannis believes that there should be a shift in perception. “These investments, given their retail availability, allow advisors to better manage risk for their clients,” she says. “They shouldn’t be thought of as alternative. They should be a necessary, core part of any portfolio. No one has the luxury to disregard risk after 2008.” Both Papagiannis and Burns posit, however, that the trading strategies and asset classes providing that risk protection might change. “If an alternative strategy becomes adopted, it may no longer provide true diversification,” Burns says. “But there will always be something alternative, whether a fundamental or strategic difference drives its returns. It’ll always be an evolving concept, what’s alternative and what’s not.” K Laura Fox is an associate marketing manager with Morningstar and a participant in the Morningstar Development Program. Heavier Use of Alternatives More advisors than in 2008 report that at least three fourths of their client groups are using alternative investments. 50% 44% 40 37% 30 23% 20 23% 19% 12% 38% 2009 2008 31% On the Web To view the full results of the 2009 Morningstar Alternative Investment Survey, go to: http://global.morningstar.com/2009Alternatives Individuals Mass Afﬂuent High Net Worth Institutional Investors MorningstarAdvisor.com 37

http://global.morningstar.com/2009Alternatives http://www.MorningstarAdvisor.com

Morningstar Advisor - December/January 2010

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