Thursday, September 3, 2015
How are Those Alternative Asset Classes Working Out
So called "alternative asset classes" have gained increasing popularity over the last few years. In fact they are in included in the portfolios of "robo advisors" aimed at inexperienced small investors.
These instruments are touted as providing returns uncorrelated wit standard asset classes thus giving additional diversification. Another benefit that is marketed is as an income producer in an environment of low interest rates.
I think it was Warren Buffett who stated that when the tide goes out we can see who is naked. A review of some of the major "alternative asset classes' shows that in many cases they simply added risk often unanticipated to portfolios.
First off here are the major asset classes for comparison
ACWI total world equity -4.9% ytd -8% one month
VTI total US equities -3.8% ytd -6.8% one month
AGG total US bonds +.4% ytd -.3% one month
Master Limited Partnerships
These have been seen as attractive due to their relatively high yield. But they also are concentrated in the energy sector. The price of oil has declined causing the same for the MLPs. Additionally as is the case in many of these assets they are all interest rate sensitive ad prospects of lower rates hurts their performance.
AMLP -13.4% ytd -3.2% one month
REITs This is again seen as a good source of income stream and a diversifier to stocks. As s the case of MLPs they are also highly interest rate sensitive
VNQ -8% ytd -7.7% one month
Commodities: This too has been touted as a diversfier away from stocks, It has generally been touted as an inflation hedge although the data on that is far from conclusive. A far better inflation hedge is inflation protected bonds. The increased exposure to commodities has not diversified portfolios from the recent market decline it has exacerbated it. The stock market selloff around the world began with China and the slower economic growth in China has driven commodity prices lower well before the stock selloff.In fact commodities have fallen so much earlier in the year that they actually have declined less than the world stock markets in the pas month.
-17.1% ytd -2.1% one month
Emerging market bonds: This has been a major target fro investment by those seeking higher yields than those available in US $ bonds. I have written numerous times that the modest pickup in yield is outweighed by the additional currency and other risks. The currency movements in emerging markets has hit this asset class hard.
-12.4% ytd One month -4.6%
"Smart Beta" has been a buzzword in investment industry over the last few years. Most of these are variants of value investing and these types of passive funds and etfs have existed for a long time.
Value strategies have suffered during the market rally which has been driven by momentum/growth stocks and have actually fallen more than the overall market last month. But these results should not be surprising value strategies are for patient investors and gain their long term performance during recoveries from market selloffs
VTV Large Value -6.9% one month -6.4%
VBR Small Value -5.9% one month -5.4%
Dividend and Dividend Growth strategies: These have gained a tremendous following. Apparently there is a large group of investor either through mutual funds, stock picking or ETFs that have flocked to higher dividend stocks and those with a record or rising dividends. Many of these investors argue that as long as the portfolio throws off attractive dividends, the price fluctuations don't matter.I find this argument illogical but it is not the place to "debate" that here.
Such portfolios tend to be highly correlated with interest rate moves higher rates drives down prices. Also the great interest in these stocks has led to high valuations with sectors like utilities often reaching above market average p/es.
SDY dividend champions
-6.9% ytd -6.4% one month
Momentum and Minimum Value
Two "smart beta" strategies that are relatively new to the ETF marketplace do offer something different and are based on some rigorous academic research. While there is never any guaranteed that what has worked in past markets will work in the future the results have been interesting.
These two seem to have in fact given exposure to factors different than"value" or "growth"
Momentum strategies have performed as advertised: stronger than market performance in strong up markets and potentially worse markets during selloffs and higher than market volatility. There is considerable overlap between momentum and "growth stocks" but there performances have differed.
MTUM +2.5% ytd -6.4% one month
Minimum Variance strategies are designed to be less volatile than the overall markets thus outperforming in down markets and underperforming in strong up markets and net providing better risk adjusted returns than the market. Although there is overlap with value indices they are distinctive enought to produce different returns
USMV -1.1 ytd -5.6% one month
Many researchers have argue that combing momentum and minimum volatility indices in a portfolio offers potential for better risk adjusted returns than the overall market. Time will tell the "live" data set when these instruments have traded is too short.