Regular readers may remember Morningstar’s inaugural survey of advisors’ and institutional investors’ views on alternative investments last year (in partnership with Barron’s). Earlier this week, the firm released the 2009 version – containing some interesting year-to-year comparisons.
As you may recall, we were struck last year by the fact that around half of all respondents felt that alternative investments weren’t just growing in importance, but that they were actually going to be more important than bread & butter staples such as equities and fixed income.
Despite the difficult year faced by many alternative asset classes, that conviction seems to be growing among advisors. As the chart below from the report illustrates, the proportion of advisors who believe alternatives will soon be as, more, or much more important than traditional investments jumped from 52% to 58% (click to enlarge).
Hesitation
This growing awareness of the importance of alternative investments seems to parallel a growing level of understanding among advisors. The more they know, it seems, the more they believe in alternative investments.
Last year, “a lack of understanding” was a close second on the list of reasons why advisors were hesitant to embrace alternatives. This year, “a lack of understanding” dropped from 46% to 39%, paling in comparison to this year’s major hesitancy: “lack of liquidity” (click to enlarge).
Among institutional investors, “fees” and “lack of understanding” both fell, while a lack of liquidity and transparency are really keeping fund managers up at night.
Holding Firm
Despite these concerns, Morningstar found that institutions are still increasing their allocations to alternative investments. Over a quarter of respondents now have alternative investment allocations of greater than 25% of their portfolios while the proportion with no alternative investment allocation has dropped from 11% to 4%. (The five year expectations of institutional investors is also clear in the chart below – click to enlarge).
But…
While institutional investors continue to show an interest in alternatives, their concern about liquidity is reflected in the fact that over half told Morningstar that they are “less likely to invest” in a fund with redemption gate clauses (the #1 reason they would be “less likely to invest”).
Reality still catching up…
Although advisors seem smitten with alternatives, fewer reported actually increasing their alternative investment allocation over the recent past. Still, the proportion of advisors with less than 5% allocated to alternatives dropped from 37% last year to 30% this year (click to enlarge).
Hedge Funds: The “go to” alternative
When asked what alternative asset class they favoured, advisors said “hedge funds” by a wide margin. While this may seem obvious (hedge funds are often described as the proto-typical “alternative investment”), check out the results from last year’s survey in the chart below. REITs and structured products trumped hedge funds in 2008, but are now eclipsed 2 to 1 by them.
(The presence of “emerging market stocks” on a list of alternative investments may raise a few eyebrows. Our jury is still out with regard to whether these are true alternative investments. However, despite the existence of some long/short emerging markets funds, most emerging markets hedge funds are heavily long bias. Still, “emerging markets stocks” is the only category above that is not a managed investment.)
There is a truckload of chartware in this presentation, so if you’re looking for some visibility on the future of alternative investments, it’s definitely worth checking out.
