Alternative investments have become widely accepted by financial advisors. In fact, nearly eight in 10 advisors say they use alternatives to provide diversification and low correlation to other portfolio assets, according to Morningstar and Barron’s Alternative Investment Survey 2013-2014. The universe of alternatives is a complex one; however, and advisors who plan to use them face varying degrees of complexity and transparency from one alternative asset type to another.
Publicly traded alternatives—including mutual funds, ETFs and securities of individual commodities and real estate firms—offer numerous advantages to retail investors and advisors. Chief among them: significant transparency. Along with that transparency, however, comes a challenge, in that there are fewer inefficiencies for skilled investors to exploit.
The appeal of public, non-listed investments
Securities that are public but not listed for trading on a stock exchange, as well as private securities may offer an appealing alternative. This segment of the securities market includes public, non-listed investment programs, such as SEC-registered, non-listed real estate investment trusts (REITs) and non-listed business development companies
Public, non-listed investment programs offer numerous advantages to investors. In particular, in the current low-rate environment, investors may find yield advantages in public, non-listed loans, which tend to offer higher yields than their publicly traded counterparts. These higher yields are a consequence of these securities’ relative lack of liquidity when compared to publicly traded investments. In addition, that lack of liquidity can help decrease volatility: Non-listed investment programs’ share prices do not fluctuate on a daily basis, which generally makes them less volatile than their publicly traded counterparts.
Considerations for clients
Clients who are considering public, non-listed investment programs should be aware of the following characteristics:
Liquidity. Many public, non-listed investments are designed to be long-term investments. For example, some non-listed securities have a seven- to 10-year life cycle from the initial launch to the final planned liquidity event. During that period, investors generally receive regular distributions, but have limited ability to sell their shares. As a result, these securities may not be appropriate for investors with more immediate liquidity needs.
Fees. Public, non-listed investments’ fee structures vary. Generally speaking, however, these securities carry a sales load of up to 15%, which includes offering and organizational expenses as well as commission. These fees can erode investors’ total return.
Where advisors make a difference
Financial advisors can use alternative investments and public non-listed securities in particular, to add diversification and growth potential to clients’ portfolios while also potentially decreasing volatility. Advisors who deploy public, non-listed investments should consider the following:
Appropriate allocations. Alternative investments in general should represent a small portion of the average investor’s portfolio. In the 2013-2014 Morningstar and Barron’s survey, 60% of advisors employed alternative allocations of 6%-20%.
Client communications. Public, non-listed investments may be unfamiliar to clients, so it’s worthwhile to put time and resources into educating them. Clients who have a thorough understanding of public, non-listed investments’ risks and benefits can make well-informed decisions about adding them to their portfolios. Such conversations also have the potential to strengthen the advisor-client relationship.
Advisors and clients may find public, non-listed investment programs a useful tool for gaining yield with low correlation to other portfolio assets. These securities may be particularly appropriate for investors who are comfortable with higher fees and a long-term lack of liquidity in return for potential longer-term growth.
More Information for Financial Advisors
To find out more, download the informative white paper, Diversifying with Alts: Constructing Portfolios that Reduce Volatility and the Likelihood of Fear-based Selling, available at www.behringerinvestments.com/evolve. This resource helps Financial Advisors hone their expertise in using alternative investments to potentially improve long-term returns by mitigating the effects of volatility that could tempt investors to do the wrong thing at the wrong time.
Diversification does not ensure a profit or guarantee against a loss. Past performance is neither indicative nor a guarantee of future results.
For educational purposes only. This material is neither an offer to sell nor the solicitation of an offer to buy any security, which can be made only by the applicable offering document.
 “2013-2014 Alternative Investment Survey of U.S. Institutions and Financial Advisors,” Morningstar/Barron's, July 2014.