Morningstar drops long-held aversion to alternatives
After a two year-long period of research, Morningstar has opted to include alternatives in its portfolios for the first time after previously only relying on equities and bonds (AP Photo/M Spencer Green)
It was interesting to note recently that as part of its latest portfolio changes, Morningstar’s model and multi-asset portfolios gained exposure to alternatives in the form of “liquid hedge funds”.
This is the culmination of a two-year-long research process which Morningstar carried out, with its alternative exposure being made up of some larger names such as Brevan Howard, Fidelity and BlackRock, spanning across equity and bond strategies such as long/short, equity neutral and macro strategies.
Before adding alternatives, Morningstar’s asset allocation consisted only of fixed income, equities and cash but the company’s concerns about inflation - and a desire to protect investors against it - meant it decided to expand its horizons.
The hedge funds act as a diversifier should there be a point where the correlation between equities and bonds is positive. “Equities go down, and also bonds go down, so you get no diversification for having more bonds,” said associate portfolio manager Nicolo Bragazza.
Is this the start of a growing trend among wealth managers? We are seeing a backdrop of increased volatility thanks to Donald Trump’s idiosyncratic view of global trade, and his subsequent U-turns.
As pension funds and insurers look to protection in the form of illiquid alternatives, what will happen to the smaller investors who do not have the scale to invest in private markets or those who need to provide sufficient liquidity?
Many of these alternative assets are, of course, significantly more expensive because they are significantly more complex than putting together a fund made up of, say, US equities.
For wealth managers specifically, the backdrop of consumer duty regulations would limit their ability to allocate to well performing, yet potentially more expensive, funds. And the FCA is looking into the issue of value for money within workplace pensions.
Can an asset owner balance a potential manager’s fee structure and pricing with their potential returns?