Questioning the Traditional Portfolio, Advisers Turn to Alternatives

Financial advisers believe traditional diversification and portfolio construction techniques need to be replaced, and are questioning the relevance of time-honored strategies of asset allocation that rely on a 60/40 mix of stocks and bonds and long-term, buy-and-hold approaches, according to a study by Natixis Global Asset Management (NGAM). Despite continued concerns about market volatility, advisers report an increased appetite for risk by individual investors, and advisers say they increasingly are turning to alternative investment strategies, even for clients not considered to be high net worth.

Nearly half of advisers (49%) are ambivalent about the benefits of the traditional 60/40 mix of stocks and bonds to achieve performance. Almost twice as many advisers believe that the traditional 60/40 portfolio allocation is no longer the best way to pursue returns and manage investment risk as those who believe it still is (40% vs. 22%). This “out with tradition” approach is shared across adviser classes, including half of advisers with 15 or fewer years of experience and 43% of those with more than 15 years of experience.

A majority of advisers (63%) do not believe in, or are unsure of the value of, long-term buy-and-hold strategies, and 77% say their clients also are questioning this approach. Just 38% believe longer holding periods decrease the likelihood of a negative annualized return.

Nearly twice as many advisers believe that new approaches in asset allocation and portfolio construction are needed compared with those who favor the status quo (46% vs. 22%).

Although most advisers (80%) say the majority of their clients are torn between a desire to increase returns and the need to keep investments safe, half (49%) say a majority of their clients are more and more willing to take on increased risk in search of returns. Fifty-eight percent say clients are beginning to place a higher priority on asset growth than protecting principal. Up to one-third of advisers (33%) say a majority of their clients are eager to make up for past losses, even if it means taking on more risk.

Advisers increasingly are interested in adding a mix of alternative investment strategies to manage the impact of market volatility and seek greater diversification in client portfolios. They are doing so not just for high-net-worth clients but also for a broader range of clients, and client asset levels.

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A majority of advisers (64%) say they are inclined to employ alternative investment strategies even for their mass-market clients, those with $200,000 to $300,000 in investable assets.

Half of advisers polled (49%) said they regularly employ alternative investing strategies across their client base. Most of those said they do so to improve diversification (79%), to reduce risk (68%), to enhance returns (51%) and to dampen volatility (42%).

“Advisers understand the importance of building more durable portfolios that are designed to do well in both up and down markets, and they are tackling the correlation across asset classes by incorporating alternative investments,” said John T. Hailer, NGAM’s president and chief executive, the Americas and Asia.

Veteran advisers with more than 15 years in the industry are more cautious about employing alternative strategies than less-seasoned advisers, with 59% of veteran advisers saying they are inclined to recommend alternative strategies for mass market clients, while 76% of less-seasoned advisers would do so.

Not all advisers use alternative investing strategies in their client portfolios. The top reasons for not doing so are: Clients believe fees are too high (20%); clients do not understand how they work (19%); and clients do not believe alternatives should replace traditional investments (19%).

Although nine in ten advisers (89%) say they are confident their clients’ current investment portfolios are designed to manage volatility, the same number (89%) recognize that mitigating the impact of market volatility is a challenge. In fact, 39% of advisers polled called it a major challenge.

Advisers who are adapting to new market conditions and investor expectations are also taking advantage of opportunities to expand their business and achieve competitive differentiation. Almost half of advisers (46%) say market conditions enabled them to boost their business in the past three years, and 54% claim market volatility has allowed them to capture assets their clients previously held elsewhere.

The 2012 Natixis Global Asset Management U.S. Advisor study was conducted online in March by CoreData Research, which surveyed 163 advisers throughout the country at 150 advisory firms that collectively manage approximately $670 billion in assets. The study was released by NGAM through its Durable Portfolio Construction Research Center.