Alternatives A Must For Diversification, Experts Say

By FA Magazine Staff,

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By Bruce W. Fraser Alternative investments such as managed futures should play a larger role in portfolio diversification, but they are still not well understood by advisors and investors, according to Genworth Financial Wealth Management. "With a volatile market, investors need to better understand true diversification, specifically the allocation of assets across different classes," Gurinder Ahluwalia, president of GFWM, said during a round-table discussion in New York City this week that sought to demystify alternative investments. "The conditions over the last few years have proven that traditional approaches may not be enough and that there is a need for investors to employ new strategies, potentially including alternative investments. Financial advisors are a critical component to helping investors incorporate alternatives into their portfolios." The discussion, led by Ahluwalia, featured Anne Lester, managing director and senior portfolio manager with J.P. Morgan Asset Management's Global Multi-Asset Group (GMAG), Jon Sundt, CEO and president of Altegris Advisors, and Michael Abelson, senior vice president of investment and product management with GFWM. Lester also cited the importance of alternatives in building a diversified portfolio for clients, but added that advisors need to be cautious. "You need to have clear expectations and goals about the risks you're trying to mitigate," she said. Investors are demanding huge risk premiums, she said, and J.P. Morgan is now overweight in risk assets. "It's still an environment constructive for risk," she said. A huge deleveraging process is under way "across the market landscape that is ongoing, and will take another three to five years to be completed," Lester said. "Corporations have finished it, individuals are part way through it, and governments haven't started it," she said."We haven't seen the repudiation of (government) debt yet." Sundt discussed the growth of alternatives, specifically addressing the need for investment portfolios to include broader diversification into non-correlated assets. "Advisors want more alternatives, but don't understand them," he said. "They need to find a trusted source to get educated and find a platform of managers to choose from." The three alternative strategies Altegris currently favors include managed futures, global macro and long-short equity, according to Sundt. Managed futures managers are trend followers, he said, who can go long or short in four major asset classes: stock indices, sovereign debt, currencies and commodities. "(Managed futures) is a diversifier with zero correlation to equities," Sundt said. "It's an all weather portfolio that can survive various markets." Global macro managers are fundamental managers who can go long or short on sovereign debt and currencies. Long-short equity managers are stock pickers who can go long or short on individual stocks. Altegris has historically provided alternative investments chiefly to institutions, high-net-worth individuals and family offices, but it is now also marketing alternatives to wealth managers and their clients, Sundt said. Thirty percent of institutions have assets in alternatives, noted Sundt, who predicted they will be considered regular investments in the retail investment market within three to five years. Abelson discussed GFWM's new focused alternative strategy platform, encompassing managed futures, which advisors can use in combination with other asset allocation approaches. GFWM introduced the platform in February. "We see significant adoption of the strategy by advisors into portfolios with typically five to fifteen percent of client assets allocated to the strategy," Abelson said. "Investors have achieved as much diversification from combining different allocation approaches, for example, strategic asset allocation and tactical asset allocation, as they could from combining disparate asset classes. "It gives advisors the capability to combine these various approaches and empowers them to deliver better solutions," he added. GFWM used the occasion to announce plans to roll out a series of mutual funds with four approaches to asset allocation: strategic, tactical constrained, tactical unconstrained and absolute return. GFWM, based in Pleasant Hill, Calif., has about $20 billion in assets under management. Core clients include more than 6,000 mostly independent advisors and RIAs nationwide. The Altegris Group of Companies, headquartered in La Jolla, Calif., with about $2 billion in AUMand $800 million in institutional clearing assets, was acquired by Genworth Financial in September. -30-

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This article appears in: Financial Advisor Center Business
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