All Market Segments Post Modest Asset Gains in a Rollercoaster Market Environment
MMI Central 2Q reports a 1.6% increase in IAS assets to slightly over $4.2 trillion during the first quarter of 2016 compared to a 1.4% rise in the S&P 500.
Although the quarterly gain was only half the 3.2% fourth quarter 2015 increase, IAS programs posted a $65 billion increase in assets in up-and-down first quarter markets, weathering for the most part the market volatility because of a relatively more diversified asset base due to increasing allocations to bonds. The ongoing shift toward fixed income in the last few years has been gradual but pronounced despite periodic bond market fluctuations. Over the last four quarters, for example, fixed income assets in Separately Managed Account (SMA) programs have risen from 41% to 48% while SMA allocations to domestic equities have fallen from 41% to 36%.
Once again, Unified Managed Accounts (UMAs) and Rep as Portfolio Manager (RPM) programs, which have by a considerable margin been the strongest performing market segments in recent years, were the fastest growing programs – albeit at a reduced pace – with increases in assets of 3.7% and 2.9%, respectively. Other segments continued the more muted trends of recent years as SMAs, Mutual Fund Advisory (MFA), and Rep as Advisor (RAA) programs grew assets by 0.6%, 0.4%, and 0.3%.
In looking at the trailing one-year growth statistics for the IAS market, one clearly sees the impact of the challenging market environment last year. While total IAS assets rose 1.6%, led by UMA with an increase of 16.7%, two other segments were marginally up – RPM at 1.4% and SMA at 0.4% – and MFA assets fell 2.5% and RAA assets dropped 0.9%. This is in sharp contrast to the trailing three-year figures that show an overall IAS asset growth of 12% led by UMA and RPM up 30.1% and 17.2%, respectively, and gains between 7% and 9% for the other three market segments.
Total IAS net inflows for the first quarter were $27.4 billion. Here, too, the leading market segment was UMAs with $14 billion in net flows followed by RPM at $11.5 billion. SMAs recorded $2.4 billion in net inflows, ETF advisory programs just over a $1 billion, MFA $300 million, and RAA posted net outflows of $1.8 billion.
“As in past quarters, we are continuing to see investors and their financial advisors move towards the disciplined asset allocation strategies and the convenient single-account format that UMA and RPM programs provide,” said Craig D. Pfeiffer, MMI President and CEO. “Facing increased market volatility, investors continue to focus on wealth preservation, and they recognize that the automated tools these programs offer enable advisors to move quickly to make the necessary adjustments during the inevitable market shifts – adjustments that give investors the comfort needed to stay the course.”
Paused, Not Peaked: Liquid Alternatives Struggle but Opportunities Remain
A special section in this edition of MMI Central – drawing on research from the recently published 2016 edition of Distribution of Alternative Investments through Wirehouses, the fifth in an annual series produced by Dover Financial Research – provides a fresh overview of the distribution of both traditional and liquid alternative investments through wirehouses.
Since 2011, there has been rapid growth in wirehouse retail alternative assets, which reached $205 billion in 2014. Wirehouse alternative investment assets, however, fell about 5% in 2015 to $195 billion with all of the decline attributable to a $12 billion drop in liquid alternative mutual funds and ETFs while traditional alternative assets grew 2%.
Among the key growth rate trends for traditional alternatives:
- Private equity has experienced steady growth, increasing 55% since 2011 and becoming the largest category among traditional alternatives in 2015 with $31 billion in assets.
- Single-manager hedge funds have seen a surge in assets, while fund-of-funds products have been flat to down. Investors have been migrating to single-manager hedge funds as wirehouses expand their due diligence, seeking lower fees and greater transparency in the underlying strategies and holdings.
- Managed futures have fallen sharply from $17 billion in 2011 to $8 billion in 2015. Assets have fled the space due to poor returns from 2011 through 2013, but the performance of trend-following strategies has rebounded since 2014, and managed futures still have strong support from wirehouse gatekeepers.
Private equity has the strongest long-term outlook of any of the traditional alternative categories. Investors have been satisfied with returns, and current investors often add new capital to the asset class as they receive distributions. On the other hand, the outlook for hedge funds is mixed, since the industry remains dogged by investor concerns about high fees, mediocre performance, and the high correlations to the equity market that hedge funds have displayed during the last year.
Looking at trends in liquid alternative investments, there are three major reasons for the drop in assets and falloff in net flows:
- Underwhelming performance: All categories of liquid alternative mutual funds have lagged the S&P for several years, pulling investors away from liquid alternatives and back into the market.
- Lack of education and product integrity: Alternative investments are complicated products employing complex investment strategies. Clearly defining a product’s strategy and explaining how each product works within a client’s portfolio is challenging for investment managers and financial advisors.
- The popularity of passive investment products: The surge in the allocation to low-cost passive investment products, such as ETFs, has worked to the detriment of mutual funds – and liquid alternative mutual funds are no exception.
For these reasons, the liquid alternatives industry struggled through 2015, leading experts to question the lasting viability of these products. However, Dover Financial Research believes that the industry has paused rather than peaked. Major distributors are committed to integrating alternative investments into portfolios, recommending strategic alternative allocations of 10% to 20% or more. That represents significant opportunity for the alternatives industry since actual retail allocations are in the single digits with some firms indicating that alternative investment holdings in most client portfolios are 5% or less. For these reasons, the study concludes, the falloff in assets in 2015 represents a pause in asset growth rather than a decline from a peak, and 2016 will be a year in which the industry reassesses products and distribution dynamics and grapples with changing market trends.