Financial advisors are recommending more alternative investment strategies in an effort to find yield. The most common support of these alternatives is the performance of the Yale’s endowment fund which has had consistent positive and market beating returns in just about every market. The reason for this has been Chief Investment Officer David Swensen’s use of uncommon investment strategies.
Wall Street noticed that success and firms have been heavily marketing absolute return mutual funds. These are black box strategies that allow an investment manager complete flexibility to invest across the spectrum of strategies and products.
The appealing aspect to absolute return is that an investment manager can use strategies to respond to economic climates. Whether or not managers do so successfully for retail investors is yet to be seen.
Before you make the leap to include absolute return strategies in your portfolio, below are a few points to consider.
First, the paradigm of advice is shifting where your advisor used to be a gatekeeper to specialized products and services, to one where the best products in the world are available to any investor, no matter the amount of their portfolio. Advisors may be clinging to the old paradigm of needing to offer a product that investors would be nervous to invest in on their own.
Next, the high cost of these strategies and management will undoubtedly make managers take on more risk to achieve the returns they need.
Perhaps the most compelling reason not to invest like Yale comes from the manager of Yale’s endowment himself. Swensen says investors should invest in market-based index funds, not absolute return strategies.
In researching a way for the individual investor to find a way to achieve similar results, Swenson determined it simply was not possible. In his book,Unconventional Success: A Fundamental Approach to Personal Investment, Swensen recommends with all assets that investors use passive index mutual funds.
If you want your investing to be based on advice from the brightest minds in investing, listen to Swensen and think twice about the promise of absolute return funds.
The preceding blog was originally published by Forbes. To view the original blog please visit our blog at Forbes. http://www.forbes.com/sites/feeonlyplanner/
