ACTIONABLE ADVICE FOR FINANCIAL ADVISORS: Newsletters and Commentaries Focused on Investment Strategy

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Cerulli Survey Results: New Themes in Advisors? Portfolio Strategies

August 17, 2010

by Bing Waldert

As tactical asset allocation reaches the mainstream, its implementation is undergoing a makeover. Early iterations of this strategy often involved making large moves in and out of the market, possibly using leveraged products to enhance returns. Increasingly, tactical moves are around the margin of a client portfolio, rather than the central strategy. For example, Morgan Stanley Smith Barney is offering its advisors guidance on how to under- and overweight various asset classes and investment disciplines. However, these recommendations may not amount to more than a few percentage points. Likewise, exchange-traded funds (ETFs) are increasingly being used to make tactical moves through exposure to a certain industry, asset class, or even region. Nearly half (43%) of Advisor Perspectives plan to increase their usage of ETFs.

Likewise, the second-most used portfolio construction method for Advisor Perspective users is core-and-explore or core-satellite. The separation of alpha and beta has been on the increase in many institutions for the better part of the last decade. As noted above, tactical asset allocation is one method by which advisors are adding alpha to client portfolios. In addition, advisors are increasingly looking to alternative investments as a way to lower risk and increase return in client portfolios. Approximately two-fifths of respondents have had their usage of alternative investments influenced by the institutions and academic research. In addition, nearly a quarter of Advisor Perspectives readers plan to increase their usage of hedge funds and non-traditional mutual funds.

However, investing in alternative investments comes with a unique set of challenges. Certainly, Bernie Madoff was a warning of the perils of incomplete due diligence, but the hurdle for manager review is quite a higher for alternative investments than with traditional long-only managers. Given the complexity of many alternative strategies, due diligence is not just to test the repeatability of a strategy, but also the operational infrastructure of the manager. With increased interest in alternative strategies, many institutional consultants have struggled to  find talent who are qualified to review alternative investment managers. Indeed, adequate due diligence is even more challenging for independent advisors seeking to include an alternatives manager in their client portfolio.