2012 Alternative Investment Survey of U.S. Institutions and Financial Advisors

Transcription

1 Morningstar and Barron s Alternative Investment Survey of U.S. Institutions and Financial Advisors June 2013

2 2012 Survey Overview 2 3 Survey aims to capture trends in alternative investing among institutions and advisors. 3 7th annual nationwide survey, conducted in March institutional investors and 471 advisors participated. 3 Institutional survey included 20 questions; advisor survey had Five free-response questions tackling new topics like hedge fund gates,managed futures fees, and active ETFs.

3 Key Takeaways 3 Investor interest is turning to alternative mutual funds and away from hedge funds. 3 Mutual funds are becoming the dominant vehicle used by both advisors and institutions to access the majority of alternative strategies. Alternative mutual funds saw inflows of $19.7 billion in 2012, while Morningstar esti mates that among funds in its database, $7.6 billion flowed out of singlestrategy hedge funds. 3 While 61% of institutions said they accessed long-short strategies via hedge funds in 2010, only 26% indicated that they used hedge funds for that strategy this year. In contrast, more than 45% of institutions said they access long-short strategies via mutual funds versus 38 in 2010.

4 Key Takeaways (continued) 4 Institutions and advisors continue to see value in alternatives. 3 Among institutions, the number of heavy users of alternatives seems to be growing. More than 20% of institutions, compared with 17% last year, said they expect alternative investments to make up more than 40% of holdings over the next five years. 3 Only 4% of advisors said their typical client had no money in alternative investments, down from 17 percent in the 2008 survey.

5 Key Takeaways (continued) 5 Institutions maintain interest in equity long-short strategies, while advisors search for yield. 3 In 2012, the long-short equity and nontraditional bond categories saw the largest alternative mutual fund flows of $6.1 billion and $5.9 billion, respectively. 3 For the second year in a row, institutions again flagged long-short equity strategies as their top choice for increased allocation the strategy ranked second for advisors. 3 Advisors also expressed particular interest in yield-producing alternatives. They cited private real estate as their top strategy for planned future investment. In addition, advisors indicated that master limited partnerships (MLPs) drove significant portfolio growth over the last five years.

6 Key Takeaways (continued) 6 3 Advisors shied away from managed futures in 2012 after citing them as their top pick in the two previous surveys. Performance may have been a factor as managed futures ETFs and mutual funds lost 15.6% and 7.4%, respectively, in 2012, similar to their losses in Institutions and advisors also expressed distaste for the undisclosed performance fees managed futures funds frequently charge.

7 Key Takeaways (continued) 7 Diversification is still driving alternative investments, but high fees are now the primary concern. 3 High fees have overtaken liquidity and transparency as the primary reasons why advisors and institutions may choose to forego alternative investments.

8 Main Topics 8 3 Alternative Mutual Fund and ETF Growth 3 Institutional and Advisor Survey Participantion 3 Defining Alternative Investment Strategies 3 Past Growth and Future Growth 3 Alternative Investment Drivers and Disincentives 3 Hot Topics in 2012: Hedge fund Gates, Managed-Futures Performance Fees, Managed-Futures Expense Ratios, Active ETFs, and Hedge Fund Replication

9 9 Alternative Mutual Fund and ETF Growth

10 Alternative Mutual Fund and ETF Growth 10 3 All seven Morningstar alternative mutual fund categories have seen tremendous inflows over the past five years. 3 Nontraditional bond mutual funds have gathered the most assets, but long-short equity and multi-alternative strategies are also gaining steam. 3 The managed futures and multialternative mutual fund categories jumped in terms of new launches in 2012, adding 22 and 17 new funds, respectively. 3 Alternative ETFs have received net inflows of $41 billion since Commodities are the most popular alternative ETF categories. 3 Over the last several years, the Trading ETF categories have seen the most launches. These categories saw outflows in 2012.

11 Alternative Mutual Fund Flows 11 $50,000,000,000 40,000,000,000 30,000,000,000 20,000,000,000 10,000,000, ,000,000,000 Nontraditional Bond Market Neutral Long/Short Equity Bear Market Multialternative Managed Futures Currency

12 Total Net Assets in Alternative Mutual Funds 12 $160,000,000, ,000,000, ,000,000, ,000,000,000 80,000,000,000 60,000,000,000 40,000,000,000 20,000,000, Nontraditional Bond Market Neutral Long/Short Equity Bear Market Multialternative Managed Futures Currency

13 Alternative ETF Flows 13 $50,000,000,000 40,000,000,000 30,000,000,000 20,000,000,000 10,000,000, ,000,000,000 Volatility Multialternative Managed Futures Currency Bear Market Trading Market Neutral Long/Short Equity Commodities

14 Total Alternative ETF Assets 14 $160,000,000, ,000,000, ,000,000, ,000,000,000 80,000,000,000 60,000,000,000 40,000,000,000 20,000,000, Volatility Multialternative Managed Futures Currency Bear Market Trading Market Neutral Long/Short Equity Commodities

15 Alternative Mutual Fund Launches by Category Nontraditional Bond Multialternative Market Neutral Managed Futures Long/Short Equity Currency Bear Market

16 ETF Launches by Category Volatility Trading Multialternative Market Neutral Managed Futures Long/Short Equity Currency Commodities Bear Market

17 Survey Participation

18 Institutional Investor 2012 Survey Participation: 235 Responses 18 Respondents % Bank 11.1 Endowment 3.8 Foundation 3.8 Insurance Company 2.6 Investment Company 41.0 Private Pension Plan 5.6 Public Pension Plan 7.3 Other 24.8

19 Institutional Investors AUM by Year 19 % >$30 billion $16 $29.9 billion $11 $15.9 billion $1 $10.9 billion <$1 billion

20 Advisor Investor 2012 Survey Participation: 271 Responses 20 Respondents % Broker/Dealer Wirehouse 2.8 Regional 3.2 Independent 19.4 Insurance 2.6 Bank 2.8 Financial Planner 13.6 RIA SEC Registered 29.9 RIA State Level 22.0 Other 3.8

21 Advisors AUM Compared to Previous Years 21 % $500M or more $100M $499M $51M $99M <$50M

22 Advisors 2012: Most Serving 100 or More Clients 22 Respondents % 20 or fewer or more 30

23 23 Defining Alternative Strategies 2012

24 Institutions: What are Alternative Investment Strategies? Top 12, ranked by 2012 % agreement 24 % Agreement % Agreement Arbitrage/ market neutral Commodity futures Private equity/ venture capital Commodities (physical) Managed futures (CTAs) Private debt Private real estate (direct or nonlisted REIT) Collectibles (including art) Long/short (equity or debt) Distressed securities Volatility/option strategies Infrastructure

25 Institutions: What are Alternative Investment Strategies? Bottom 12, ranked by 2012 % agreement 25 % Agreement % Agreement Foreign exchange/ currency Public (listed) real estate / Frontier markets Leveraged/inverse ETF/ETN Emerging market bonds Commodity equities Emerging market stocks Capital protected strategies/ principal guarantee TIPS GTAA (Global Tactical Asset Allocation) International small cap

26 Institutions: Other Alternative Strategies 26 3 Event-driven, global macro, structured credit 3 Natural resources, farmland, and timberland 3 Master Limited Partnerships (MLPs) 3 Floating rate loans 3 Hedge funds 3 Several participants listed hedge funds under other strategies, highlighting the confusion between alternative strategies and the vehicles in which they are offered.

27 Advisors: What are Alternative Investment Strategies? Top 12, ranked by 2012 % agreement 27 % Agreement % Agreement Managed futures (CTAs) Long/short (equity or debt) Commodity futures Foreign exchange/currency Arbitrage/market neutral Private debt Private equity/ venture capital Volatility/option strategies Private real estate (direct or nonlisted REIT) Collectibles (including art) Commodities (physical) Leveraged/inverse ETF/ETN 52 49

28 Advisors: What are Alternative Investment Strategies? Bottom 12, ranked by 2012 % agreement 28 % Agreement % Agreement Commodity equities Infrastructure Distressed securities Frontier markets Public (listed) real estate Emerging market bonds / Emerging market stocks Capital protected strategies/ principal guarantee TIPS GTAA (Global Tactical Asset Allocation) International small cap

29 Advisors: Other Alternative Strategies 29 3 Timber and farmland 3 MLPs, precious metal, oil & gas 3 Absolute return 3 Business Development Companies (BDCs) 3 Equipment leasing 3 Structured notes

30 30 Past and Future Alternative Growth

31 Institutions: Average Annual Growth in Alternative AUM Over Last Five Years 31 % Respondents Greater than 30% 21 30% 11 20% 1 10% No Growth Usage has Declined

32 Advisors: Estimated Average Annual Growth in Alternative AUM Over Last Five Years 32 % Respondents Greater than 30% 21 30% 11 20% 1 10% No Growth Usage has Declined

33 Institutions: Strategies Representing Largest Alternative Allocation Over Last Five Years 33 Long-short (equity or debt) 21 % Other alternative investment(s) Private equity/venture capital GTAA (Global Tactical Asset Allocation) Arbitrage/market-neutral Private real estate (direct or nonlisted REIT) Public (listed) real estate

34 Institutions: Other Alternative Investment Strategies 34 3 MLPs 3 Global Macro Strategies 3 Absolute Return 3 Multi-Strategy 3 Oil, Gas, and Natural Resources 3 Fund of Funds and Hedge Funds 3 Structured Credit

35 Advisors: Alternative Strategy That Provided Greatest Growth to Business Over Last Five Years 35 % Respondents Private real estate (direct or nonlisted REIT) Other alternative investment(s) Long-short (equity or debt) GTAA (Global Tactical Asset Allocation) Public (listed) real estate

36 Advisors: Other Growth-Driving Alternative Strategies 36 3 MLPs 3 Structured Notes 3 Risk Parity 3 Oil and Gas 3 BDCs 3 Multi-Strategy 3 They have no impact on the growth of my business 3 I do not use alternative investments

37 Institutions: Allocation to Alternative Investments Over Time 37 % Respondents % Respondents 0% % % % % Over 25% %

38 Institutions and Advisors: Allocation to Alternative Investments in % Respondents % Respondents 0% Institutions Advisors % Institutions 5 Advisors 9 1 5% % % % % % % Over 40% 21 4

39 Institutions: Allocation to Alternatives Over the Next Five Years 39 % Respondents % Respondents 0% % % % % Over 25% %

40 Institutions: Top Alternative Strategies for Increased Allocation 40 % Respondents Long-short (equity or debt) Private equity/venture capital Other alternative investment(s) Arbitrage/market-neutral Managed Futures Volatility Public (listed) real estate

41 Advisors: Anticipated Annual Growth in Alternative AUM 41 % Respondents 0% % 11 20% 21 30% Greater than 30%

42 Advisors: Top Alternative Strategies for Growth of Business 42 % Respondents Other alternative investment(s) Private Real Estate Long/Short Equity or Debt Global Tactical Asset Allocation Private Debt Emerging-Markets Stocks

43 Alternative Investment Growth: Conclusions 43 3 Institutions were more extreme in their usage of alternative investments than advisors in 2012; 21% responded that they allocated over 40% of their portfolios to alternative investments, while 43% allocated 10% or less to alternatives. 3 On the other hand, 63% of advisors allocated somewhere between 6% and 20% of their clients portfolios to alternative investments. Only 15% of advisors anticipated allocating over 20% to alternative investments over the next five years. 3 Institutions are considering primarily long-short equity and private equity for increased allocation over the next five years, while advisors are interested in private real-estate and long-short equity.

44 44 Alternative Investment Drivers and Disincentives

45 Institutions: Importance of Alternative Investments Relative to Traditional Investments 45 % Respondents Much Less Important Somewhat Less Important As Important Somewhat More Important Much More Important

46 Advisors: Importance of Alternative Investments Relative to Traditional Investments 46 % Respondents Much Less Important Somewhat Less Important As Important Somewhat More Important Much More Important

47 Institutions and Advisors: Top Drivers of Investments in Alternatives 47 % Respondents Diversification/Low Correlation Enhance Risk-Adjusted Profile Absolute Returns Offer clients investments they wouldn t find on their own Enhance Yield Poor Bond Market Outlook Institutions Advisors

48 Institutions and Advisors: Top Reasons to Hesitate Investing in Alternatives 48 % Respondents Fees Lack of Liquidity Lack of Transparency Benefits are Uncertain Lack of clarity on how strategy works in portfolio framework Institutions Advisors

49 Advisors: Top Reasons to Hesitate Investing in Alternatives 49 % Respondents Fees Lack of Liquidity Lack of Transparency Benefits are Uncertain

50 Institutions: Top Reasons to Hesitate Investing in Alternatives 50 % Respondents Fees Lack of Liquidity Benefits are Uncertain Lack of Transparency

51 Institutions: Investment Vehicles Used to Access Alternative Strategies /30 Hedge Funds/Private Pools 6 Commodity Futures Arbitrage/ Market Neutral Mutual Funds ETFs/ETNs Managed Accounts % Respondents % Respondents Distressed Securities Hedge Funds/Private Pools Mutual Funds ETFs/ETNs Managed Accounts Capital Protected Strategies Emerging Markets Bonds Collectibles (Including Art) Emerging Markets Stocks Commodities (Physical) Foreign Exchange/Currency Commodity Equities Frontier Markets

52 Institutions: Investment Vehicles Used to Access Alternative Strategies 52 Global Tactical Asset Allocation Infrastructure International Small Cap Leveraged/Inverse ETF/ETN Hedge Funds/Private Pools Mutual Funds ETFs/ETNs Managed Accounts % Respondents % Respondents Private Debt Private Equity/VC Private Real Estate Public/Listed Real Estate Hedge Funds/Private Pools Mutual Funds ETFs/ETNs Managed Accounts Long/Short (Equity or Debt) TIPS Managed Futures (CTAs) Volatility/Option Strategies

53 Advisors: Investment Vehicles Used to Access Alternative Strategies /30 Hedge Funds/Private Pools 1 Commodity Futures Mutual Funds ETFs/ETNs Managed Accounts % Respondents % Respondents Hedge Funds/Private Pools Mutual Funds ETFs/ETNs Managed Accounts Arbitrage/ Market Neutral Distressed Securities Capital Protected Strategies Emerging Markets Bonds Collectibles (Including Art) Emerging Markets Stocks Commodities (Physical) Foreign Exchange/Currency Commodity Equities Frontier Markets

54 Advisors: Investment Vehicles Used to Access Alternative Strategies 54 Global Tactical Asset Allocation Hedge Funds/Private Pools Mutual Funds ETFs/ETNs Managed Accounts % Respondents % Respondents Private Debt Hedge Funds/Private Pools Mutual Funds ETFs/ETNs Managed Accounts Infrastructure Private Equity/VC International Small Cap Private Real Estate Leveraged/Inverse ETF/ETN Public/Listed Real Estate Long/Short (Equity or Debt) TIPS Managed Futures (CTAs) Volatility/Option Strategies

55 Drivers and Disincentives: Conclusions 55 3 Fees and lack of liquidity remain the foremost concerns regarding alternative investments for both institutions and advisors. 3 Both institutions and advisors are seeking diversification and enhanced risk-adjusted returns from alternative investments over absolute returns. 3 Institutions are increasingly using mutual fund vehicles for many types of alternative strategies (arbitrage/market neutral, long-short equity, managed futures, and global tactical asset allocation, for example) and asset classes (commodities or emerging markets stocks and bonds, for example).

56 56 Hot Topics in Hedge Fund Gates 3 Managed-Future Performance Fees 3 Managed-Futures Expense Ratios 3 Active ETFs 3 Hedge Fund Replication

57 Hot Topic: Hedge Fund Gates 57 Has the recent attention surrounding hedge fund redemption gates (Salient Endowment Fund, Perella Weinberg Partners, Alden Global Distressed Opportunities, etc.) caused you to reconsider hedge fund vehicles? % Respondents Yes, gates cause me to seriously reconsider investing in hedge funds at all. Yes, gates make me somewhat more reluctant to invest in hedge funds. No, I don t invest in hedge funds anyway. No, redemption gates do not deter me from investing in hedge funds. Institutions Advisors

58 Hedge Fund Gates 58 3 Most institutions and advisors responded that hedge fund gates were not an issue, because they do not invest in hedge funds in the first place, preferring liquidity. 3 Advisor comments: 3 Liquidity is a huge issue for our clients. Operationally, we know many hedge fund strategies don t require lock-ups/gates. That is why we see so many moving to 1940 mutual fund structures. 3 After with the gates coming down most of our high net worth investors were done with the old platform, but they realize they need these type of strategies in their portfolios and although they realize they are giving up some of the juice (leverage, private equity), they are more comfortable with a liquid mutual fund exposure

59 Hedge Fund Gates 59 3 Institutions that did invest in hedge funds were concerned about hedge fund gates. 3 Institution comments: 3 Always something we concern ourselves with, but hasn t changed the feeling that we should invest in hedge funds. 3 Gates makes us more cautious of certain types of hedge strategies that are more likely to impose gates 3 They make us truly look for an illiquidity premium when investing

60 Hot Topic: Managed-Futures Performance Fees 60 Do you believe managed-futures mutual funds should be able to charge performance fees? % Respondents Yes, they should be allowed to charge performance fees. No, they shouldn t be allowed to charge performance fees, as other mutual funds cannot. Institutions Advisors

61 Managed-Futures Performance Fees 61 3 The majority of advisors and institutions responded that managed-futures mutual funds should not charge performance fees. 3 Those who believed performance fees should be allowed were concerned about transparency and performance benchmarks. 3 Both groups believed that the market would decide whether paying performance fees are worthwhile.

62 Managed-Futures Performance Fees 62 3 Advisor comments: 3 All the mutual funds should be treated equally. If managedfutures wants to get into mutual funds arena, they should follow the same rule. 3 Institution comments: 3 They should be able to charge performance fees, but the transparency of fee disclosure is a concern. 3 Yes, above the manager specific benchmark. 3 All funds should have the discretion to charge whatever level and type of fees they want. The marketplace can decide whether to pay them.

63 Hot Topic: Managed-Futures Expense Ratios 63 Do you believe managed-futures mutual funds performance fees should be included in their expense ratios? Yes Institutions 86 Advisors 89 No % Respondents

64 Managed-Futures Expense Ratios 64 3 The vast majority of advisors and institutions believed that performance fees should be included in a fund s expense ratio. 3 Advisor comments: 3 By including it in the expense ratio, it provides more transparency and allows investors to compare the investments on equal footing. 3 There should be a separate line item in any analysis that shows the performance fee for each year in order to give investors a true representation on how performance affects compensation.

65 Managed-Futures Expense Ratios 65 3 Institution comments: 3 [Performance fees] should be disclosed in same area as expense ratios but broken out and aggregated. 3 A performance fee by nature will be variable, so including it in a static expense ratio would not be appropriate. It must however be disclosed.

66 Hot Topic: Active ETFs 66 Now that the SEC has lifted the moratorium on derivative usage in ETFs, and now that actively managed ETFs (PIMCO Total Return BOND, for example) have gained some traction, are you interested in gaining access to more alternative strategies through ETFs? % Respondents Yes, I am interested in gaining access alternatives through ETFs. No, I prefer other vehicles to gain access to alternative strategies. Institutions Advisors

67 Active ETFs 67 3 Advisors, and to a lesser extent institutions, are interested in gaining access to more alternatives strategies through ETFs, now that derivatives can be used in these vehicles. 3 Advisor comments: 3 Pricing on Managed ETFs has not been favorable, but the tax efficiency an ETF can provide, especially in the alternative space, would be attractive. 3 Institution comments: 3 If they are truly fee advantageous. 3 We prefer other vehicles to gain access to alternative strategies, but alternative ETFs would be an option in gaining access to this asset class for certain clients.

68 Hot Topic: Hedge Fund Replication 68 Now that more and more hedge fund strategies can be directly accessed through mutual funds or ETFs, do hedge fund replication strategies still appeal to you or your clients? % Respondents Yes, I am still a big proponent of hedge fund replication strategies. Yes, hedge fund replication strategies still have some appeal. No, I am no longer interested in hedge fund replication strategies. No, I was never interested in hedge fund replication strategies. Not applicable I m not sure what a hedge fund replication strategy is. Institutions Advisors

69 Hedge Fund Replication 69 3 Despite the availability of direct hedge fund strategies in mutual funds and ETFs, hedge fund replication is still of interest to some advisors and institutions. 3 Advisor comments: 3 Regulation, Tax Transparency, Liquidity, and Transparency are the keywords. 3 I am concerned that, while beta may be replicated, the opportunity of alpha will be lost. 3 Institution comment: 3 Replication holds good promise, but has yet to deliver in a way that would cause serious consideration. Still we re keeping an eye on it.

70 Credits 70 Editors Nadia Papagiannis, Director of Alternative Investments Josh Charney, Alternative Investments Analyst Alexa Auerbach, Director of Corporate Communications, Institutional Business Beverly Goodman, Mutual Fund Editor at Barron s Survey Results Analysts Joyce Chen Caroline Gorman David McFarlin Julia Wu Design Claire Gaynor Bojan Radojcic Alexander Hayashi

71 Questions? 71 Josh Charney Alexa Auerbach