Investors treat alternative funds equally
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Krystine Lumanta is a journalist with InvestorDaily, a Morningstar publication.
Australian investors are treating the wide variety of alternative investments equally, due to a lack of understanding of the sector and relying on historical returns, a QIC portfolio manager has said.
While the interest in alternative offerings has been growing since the global financial crisis, many investors believe that all alternative funds worked the same.
This has left many "learning the hard way" when outright bear funds only succeeded in down markets, while others performed well during times of economic growth, QIC fund manager James Dick told InvestorDaily.
In addition, investors also had a tendency of making decisions based on historical returns and selecting alternative funds that had performed well.
"If it's gone well in the past, they hope or expect that it does well in the future," Dick said.
"There's always that disclaimer that historical returns are no guide to future performance and that's absolutely true, but some people do forget it."
According to Dick, investors sometimes need to pull back from asset classes that have performed well in the recent past and instead focus on the "unloved" or at the very least, fairly priced assets.
Furthermore, the cultural alignment between fiduciaries and fund managers has been the biggest improvement over the last 10 years, as it filters down and influences investor knowledge, Dick said.
"If there's any kind of misalignment, then fiduciaries are ultimately going to be the ones who suffer, as well as investors.
"The growing scepticism of fiduciaries and their [desire] to see more alignment with fund managers' thinking is helping, as it's not necessarily just limited to have a performance fee alignment. You need to have cultural alignment as well."
Investors weren't necessarily attracted to cheaper-priced alternative funds, as they will first need to assess the reasons for its inclusion in the portfolio, Dick said.
"If you think about alternatives as the alpha that is making the most amount of money then I think you do have to pay for skill, so you don't want to be paying peanuts," he said.
"If you're talking about alternatives as additional asset classes, as betas, you don't really have to pay for that diversification because it's going to cost you more than index equities but you're not talking about performance fees and high base costs - it will be more realistic.
"Experienced investors know that alternative investments can be very attractive in volatile markets, but what is much harder to ascertain is which of the alternatives is going to save the day."