Despite alternative investments having earned a rightful place in a well-balanced portfolio for some time, only 50% of financial advisors say they use them in their clients’ portfolios, according to a survey of about 400 advisors by PGIM Investments.
The survey, a quarterly effort that collected data in the last week of May and the first week of June, found that only half of polled advisors said they used alternatives, with 31% indicating they felt they had good access to a wide range of options and 19% indicating they felt they had limited access. The other half of advisors didn’t lean on this asset class at all, despite an investment environment that has many in the industry touting alternatives as an important part of any asset mix.
As the advisory community is becoming painfully aware, the historical negative correlation between stock and bond returns no longer plays out like it used to because of flatlined interest rates. More recently, a positive correlation has emerged, and more advisors should be looking to alternative assets to mitigate risk and bump overall returns, the survey said, adding that the most common alternatives are liquid alternative mutual funds, real estate investment trusts, private equity, private debt, private real estate and hedge funds.
For the advisors who are utilizing alternative investments, the most common vehicles are mutual funds and ETFs. Part of the reason for this may be familiarity—for decades only institutional investors had access to alternatives, and funds are easy for independent financial advisors to explain and for their clients to understand. Closed-end funds, and master feeder vehicles and limited partnerships rounded out the top three. “These options continue to evolve as asset managers bring these solutions downstream,” the survey said.
Even though only half of advisors said they use alternative investments in client portfolios, 71% said they viewed alternatives as important tools in promoting portfolio diversification, delivering institutional-quality products to their clients, and demonstrating the value of a financial advisor in identifying and accessing investment opportunities clients might not pursue on their own.
Twenty-nine percent of advisors, however, indicated they felt the opposite and considered alternative investments inappropriate for their clients.
PGIM is a global asset manager with about $1.5 trillion in total assets under management, of which about $253 billion, or about 17%, is in alternative investments.
