Are "Alternatives, Emerging Markets, And Frontier" The New "Stocks, Bonds, And Cash?"
Tuesday, May 15, 2012 10:33

Tags: alternative investments | emerging markets | investing

The past five years have seen the CBOE Volatility Index (VIX), a measure of volatility in the S&P 500, spike to levels of 80.86 (November 20, 2008) and 48 (August 8, 2011) from levels of between 15 to 20 only a few years ago.

From 1990 – 2011, the HRFI Fund of Funds Index had a net return of 7.85% with a standard deviation of 5.88. The S&P 500 index returned 8.61% over the same period but with a standard deviation of 15.06.
Many investors are making the switch from more traditional asset classes to alternatives. Is this a smart move or are investors taking more risk than they should?

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Particularly for income-seeking investors, the Fed interest rate target of between zero and .25% has made it difficult to live off of traditional income-producing instruments.
The Barclay’s Aggregate Bond index returned -.02 in February, -.55% in March, and only 1.11% in April. The S&P 500 produced total returns of 4.30% in February, 3.29% in March, and -.63% in April.
Since alternatives offer comparable returns over time with less volatility, who can blame investors for looking elsewhere?  
Alternatives are showing up in retirement accounts, mutual funds, and even variable annuities. Demand has grown so much for the vehicles that the number of alternative-strategy mutual funds has reportedly increased by 56% since 2008.
A recent Cerulli report predicts that exposure to alternatives will increase from the traditional 2% to 3% to 20% over the next five years.
Alternatives were attractive long before 2008 and investors invested heavily in them. But the liquidity constraints of limited partnership structures and the severe declines of the capital markets in 2008 left many with badly battered portfolios and few resources to reinvest.
So the liquidity of mutual funds, ETFs, and other structures is much more investor friendly than the limited partnerships of a few years ago.
Emerging economies have developed to a point where they now offer little in the way of diversification from developed markets with a correlation of .9. (1 signifies full correlation) Still, the Cerulli report showed emerging markets funds net inflows at a rate of $21 billion for the year ended March 31.
Meanwhile, US equity funds saw money flow away from them to the tune of $76 billion over the same period.
Frontier markets—countries like Africa, Ethiopia, Ghana, Eastern Europe, Middle East, and South America—have taken over emerging markets as the high risk, low correlation alternative.
Analysts compare their point in development to Brazil and China 10 to 15 years ago. And the correlation of frontier markets to more developed markets is .6.
But these markest also are quite vulnerable to geopolitical risks and much of the population still lives in extreme poverty. So investors should carefully weigh the risks and perhaps invest only a small portion of their opportunistic portfolio allocation.
The potential for growth is definitely there, although emerging markets are still offering significantly better returns. Year-to-date, the MSCI Frontier Markets Index was up .99% year to date through May 9 while the MSCI Emerging Markets Index was up 6.71%.
Should your clients abandon stocks, bonds, and cash for alternatives, emerging markets, and frontier? Probably not. But you can help them develop smart strategies such as a core and spoke approach for taking advantage of the above-market returns and risk management possiblities they may offer.


Oil Prices Edge Lower On Continued Worries About Europe And China
Monday, May 14, 2012 11:14

Tags: China | European crisis | oil

Oil prices continued their retreat as a result of growing fears about Greece and the possibility of disintegration of the euro. China’s economy continues to send mixed signals, with the government in April proclaiming healthy growth in its manufacturing index and forecasting greater strength in the second quarter  on the one hand and weak industrial output data being reported just last week (the week of May 7) on the other.

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Industrial production is the primary impetus behind China’s growth. As the largest consumer of oil, a slowdown in China’s economy also signals a slowdown in oil consumption.
These and other factors are converging into the oil price scenario. Saudi Arabia initially gave relief to a rise in prices as it seemed to neutralize the possible effects of Iran’s threats to cut off supply.
The inability of Europe to forge a lasting solution to Greece’s problems has resulted in one political upset in France and may affect the influence of Chancellor Angela Merkel’s party in Germany. All of this combined with Saudi’s target price of $100 on a barrel of oil is affecting global sentiment on oil.


An Outlier Case Illustrates The Need To Dig Further For Client Information
Monday, May 14, 2012 10:51

Tags: client communications | IRA | retirement planning

In yet another case of how family dynamics affect investment advice, a man who left his pension to his wife. On the surface, this would seem to be a pretty normal state of affairs. The catch is, this man had another wife whom he never divorced—and about whom he never told anyone. So the matter of which wife gets the pension benefits has been bantered back and forth within the legal system—and at multiple levels.

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Such incidents can become a liability issue for you, especially if you are the advisor on the retirement plan. That may apply to any retirement plan, including IRA accounts on which you have been advising. Since there are multiple types of partners and significant relationships today, it may be advisable to ask clients about their marital situations or what type of legal status they have in their relationship with a partner.
This may seem to be an outlier case. The matter is complicated by the fact that the Employee Retirement Income Security Act (ERISA) stipulates that benefits are to be paid to one's legal spouse unless that spouse signs a waiver. This woman this man first married did not sign such a waiver. She found out about the pension plan after the man died and brought suit, claiming the benefits were rightly hers.
As outlandish as it may seem, the case illustrates that we need to find out as much information about our clients' lives and families as possible. Assuming anything—especially marital or relationships status—could prove to be counter to their best interests and yours.


Health Care Planning Is Quickly Becoming A Focal Point For Investment Strategies
Monday, May 14, 2012 10:37

Tags: financial planning | health care | healthcare | investing

There’s an issue about which your clients may be thinking and not disclosing when you meet. That’s the issue of healthcare. A recent survey by National Financial showed that fully half of imminent retirees are significantly fearful of what healthcare costs will do to their retirement prospects and the quality of their retirement life. And as much as 38% of those have yet to mention these concerns to their financial advisor.

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Part of the reason may be that clients are unsure how well advisors are equipped to help them deal with this issue. Healthcare traditionally has been considered outside of the normal realm of financial and investment advice. But with an aging segment that is still the largest percentage of the world’s population, investing for healthcare may soon become a normal aspect of investment advice.
Ramping up on healthcare laws and issues may also help client relationships become stickier. Over half of survey respondents indicated they would have more of a tendency to stay with an advisor who understood their healthcare issues and helped address them. It’s difficult for clients to know exactly what their health related costs will be during retirement since they usually only pay part of those costs while they are still working.
Higher net worth clients may also wish to have more customized plans, the ongoing funding for which may need to be worked into a financial and investment strategy.


NAPFA Panel Shows That The Bag Lady Syndrome Is Still Alive And Well, Even Among Successful Women
Monday, May 14, 2012 10:18

Tags: financial planning | NAPFA | women investors

A panel of four women at the recent NAPFA conference showed just how real the so-called bag lady syndrome is, even for women who have achieved great success by just about any measure. It further showed how investors need to be educated on the difference in investing and financial planning.

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Fears about health care, running out of money, losing a spouse or partner, and being able to provide quality education for children were paramount concerns among the panel members. The women’s comments further showed how imperative it is to integrate all sides of a client’s financial picture within an overall investment plan or strategy.
The bag lady syndrome characterizes women with very healthy net worths--even in the millions of dollars--who are fearful that they still might one day become a homeless person on the street. Having to take care of elderly parents as well as to raise and launch children into a world with high unemployment is a situation many women—and many couples—face. Add the threat of healthcare costs, especially in light of increased longevity, and these fears become even more real.
Questions from the panel were thrown out to advisors in attendance at the conference. Although advice for each woman’s particular problem was contributed, individual client situations are complex and need much more thorough evaluation than in a conference setting. These types of sessions, however, point out great opportunities to educate your clients on even basic issues. They also show how you can help them more robustly address their investment and financial challenges. 


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