As equity markets hit all-time highs again, investors haven’t forgotten the 2008 market meltdown that resulted in a 40 percent loss.
And now they are prodding money mangers to help protect them against another one.
To accommodate the well-heeled investors’ cautiousness, money managers and advisers are diversifying assets away from the bubble-prone stock market and into alternative assets like real estate, commodities and sometimes mutual funds that can short the stock market.
It is a trend that many asset managers see continuing over the next few years, several market-research firms say.
“Alternative products are attracting interest from retail and institutional investors, as both are increasingly looking for portfolio diversification, enhanced returns and risk management,” says Michele Giuditta, associate director at Cerulli Associates, a securities-industry consultant.
And the most important reason for this move by big asset managers away from stocks has been the need to diversify investments, says a study by Strategic Insight, another market-consulting firm.
The move into hard assets and away from equities comes as many market pros say they are becoming wary about the bullish stock market, which was recently up by about 20 percent for the year.
Indeed, the Cerulli report, which surveyed asset managers who run big portfolios for affluent investors, says the amount of money in alternative assets — nontraditional investments that have little correlation to the stock market — will dramatically rise over the next five years.
This smart-money survey encompasses a broad range of asset managers. They run the gamut from a $100 million manager to $100 billion-plus managers with many different investing products.
The use of alternative assets will go from 2 percent of total mutual fund assets to 14 percent over the next decade, according to the Strategic Insight study.
Strategic Insight added that the diversification movement has been going on since the crash, with the amount of money in alternatives exploding.
“Alternative funds have more than doubled since 2008 and could do so again in the next five years,” according to the Strategic Insight report.
The market consultant said the amounts in alternative mutual fund assets would likely go from about $245 billion today to $490 billion in 2018.
Some 71 percent of asset managers surveyed said diversification and the need to reduce volatility — the riskiness of a portfolio — are why they have been moving into alternative investments.
But the desire to obtain alpha managers who can get higher returns represents only about 6 percent of the reasons advisers are investing client funds.
“What we have seen for the last five or six years are what I call a semipermanent state of investment anxiety,” said Avi Nachmany, executive vice president and director of research at Strategic Insight.
Nachmany said that this state of investment anxiety is the result of many things, including the recent partial government shutdown and the current historically low interest rates.
Such factors have led investors to keep large amounts of assets in cash as well as alternative assets.
“It is the result,” Nachmany added, “of uncertainty about both the stock and bond markets.”
The actions of big money managers are filtering down to individual advisers, as well.
For instance, a Long Island adviser says he uses these alternative investments, in part, to allay investor fears.
“We are using alternative investments in part so clients can sleep at night. They reduce the volatility of investing,” said Ronald Rogé, a certified financial planner in Bohemia, NY.
His clients tend to be those earning $200,000 or more a year.