For many investors who have enjoyed the run higher in global stocks over the past five years, it makes sense in our view to reduce risk and lower overall portfolio volatility by adding alternatives, especially given the current equity valuations and concerns over rising interest rates.
The weight given to alternative investments can come from either stocks or bonds, or a combination of both, with more coming out of traditional fixed income, which is what we generally advocate.
Investors have a dilemma. We believe they recognize that traditional fixed income may not provide the same diversification benefits it has in the last 30 years due to historically low interest rates combined with the threat of future inflation and rising interest rates. At the same time, they need to find ways to lower portfolio volatility and risk without adding fixed income.
The growth of the liquid alternatives asset class appears to indicate that advisors and investors are addressing this dilemma by using alternatives.
The proliferation of ETFs investing in nontraditional asset classes has democratized investing in alternative asset classes. The days of buying gold and real estate and calling it a day are long gone.
We advocate allocating to a broad set of alternative investments in an effort to gain robust exposure to the category and realize the diversification benefits of alternatives that were not possible for most investors before the introduction of liquid alternatives.
We think it makes sense to take a core-and-explore approach to the category by allocating to a handful of core alternatives to gain beta and then tactically managing long/short exposure in currency, commodity, equity and fixed-income allocations.
In our view, ETFs make tactically allocating attractive and cheap. No longer does an investor need to allocate to a managed-futures manager and pay high fees to gain access to the space.
Tactical choices that we currently favor in commodities are the iPath S&P GSCI Crude Oil ETN (OIL | A-92), the ETFS Physical Palladium (PALL | A-100) and the iPath Cocoa ETN (NIB | B-96). In addition, gold’s trend appears to be improving given the geopolitical tensions around the globe, and a close above $134 in the SPDR Gold Shares (GLD | A-100) would be a breakout.
In our opinion, a practical way to allocate to liquid alternatives is through a manager with a seasoned track record in the space.
Clark Capital Management Group is an independent investment advisory firm providing institutional-quality investment solutions to individual investors, corporations, foundations and retirement plans. Clark Capital was founded in 1986 and has been entrusted with approximately $3 billion in assets. For more information about Clark, contact Advisor Support at 800-766-2264 or [email protected]. Please click here for a complete list of relevant disclosures and definitions.