SAN ANTONIO – Defined contribution plans have been slow to move into alternative investments but many of the nation's largest pension funds are investing billions of dollars in alts and so should you.
That, at least, is how Gene Huxhold, senior managing director of John Hancock Investments, and Steve Medina, co-head of global asset location at John Hancock Asset Management, feel about alternatives.
"Alts are not synonymous with risk … and alts can be an option to reduce volatility," Huxhold said at the start of a presentation Tuesday at the Center for Due Diligence conference. "They're not complicated, and they're appropriate for a DC plan."
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His disclaimer is understandable. Introduced less than a decade ago, investments in alt funds have been growing fast. As of 2010, employee benefit plans had about $3 trillion invested in alternative investments. But returns generally have been in the mid- to high single digits – decent, though certainly not out of this world.
Alts, according to some in the business, also might be too expensive. And they've generated a bit of negative press.
As reported by BenefitsPro on Oct. 1, an audit by the Office of Inspector General concluded the Employee Benefit Security Administration is not providing enough oversight of ERISA retirement plans that invest in alternatives.
Still, alts are here to stay and interest is growing. In 2010, 34 percent of institutions had more than one-quarter of their portfolios in alternatives, according to Morningstar. Research released last year showed 78 percent of all advisors were using alternatives.
But, of course, anyone in the business of offering investment opportunities is always looking for more investors.
Huxhold, for one, did acknowledge alts are complicated and DC plan advisors and sponsors are still learning about them.
Offering the John Hancock definition, alts best can be viewed best as "exposures that provide return streams that are unique relative to traditional equity and fixed-income investments," he said.
More plainly, alternatives can include private equity and other illiquid types of investments. But they're not always among the more exotic investments, either. Investing, for instance, in gold, real estate and timber is considered by many to be an alternative investment.
The question moving forward, Huxhold and Medina said, is just how much alt is the right amount for your portfolio.
"Enough to make a difference," Medina said.
That would mean more than 5 percent, he said, a figure suggested recently by a Morningstar executive.
"Five percent isn't enough," Medina said. "Twenty percent is better."
Whatever the level, the next question likely to come up is how to fund alt buys.
Medina suggested a redirection of allocations away from traditional investments.
"I'd say half equity and half fixed-income," he said, as a way of better balancing a portfolio.
Funding for alternatives also can come from one other place, he said.
"Think about what was your worst idea,'" he said. "This year, we hated TIPS (Treasury Inflation-Protected Securities). You can allocate the client's exposure to alternatives investments from the worst idea."
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