Alternative fund managers are getting a boost from a movement among retirement plan advisers to use more open architecture and custom target-date funds, according to interviews with managers and advisers who work in the space.
Late last month Vanguard filed paperwork to launch a multistrategy alternatives fund to offer that fund as part of a retirement solution, Vanguard Managed Payout Fund, a fund of funds designed to provide investors with a 4% annual payout, typically in retirement.
The move comes on top of the growth of customized target-date funds and open architecture lineups that provide more access to outside fund managers who offer hedge fund style investments.
“It's getting better,” said Stan Milvancev, an executive vice president at Sequoia Financial Group in Akron, Ohio, who advises plans to make use of alternatives for diversification benefits. “They have as low as about half a percent in alternatives and as high as around 12%.”
So-called “liquid” alternatives — hedge fund-style strategies served up as a mutual fund — have to overcome many of the same challenges to get into target-date funds that they do in normal portfolios, according to Jonathan Dale, distribution director for the Investment Management Services unit at SEI. Few of the funds have long track records, for one.
But retirement plan experts say some of the hurdles are more magnified. While price is a concern to all investors, the retirement plan marketplace is particularly fee-conscious.
Fund fees dropped nearly 5% to an average of 1.02% in 2013 from 1.07% in 2009. But alts charged 1.45% in 2013, down less than a percent from 2009, according to Lipper Inc.
That didn't stop Manning & Napier Advisors Inc., which now makes use of managed futures, an alternative investment strategy, in its target-date series. “Managed futures have this characteristic of taking advantage of volatility,” said Jeffrey S. Coons, president of Manning & Napier. He said trimming volatility keeps employees invested.
“You don't want to do any harm [to plan participants], and not doing any harm includes not scaring them,” said Mr. Coons. “If they see it drop in half, they say, 'I'm done.'”
“It's starting to find its way in today — it's been a little bit slow in the uptake,” said Andrew G. Arnott, president and chief executive officer at John Hancock Investments, which offers alternatives in its target-date series. “When you look at target-date funds there are not many that are multimanager. Most of the larger ones are managed internally and the assets tend to be with one shop. Not all of those shops that are big in target date are big in alternatives.”
The largest target-date series are run by the Vanguard Group Inc., Fidelity Investments and the T. Rowe Price Group Inc. T. Rowe Price declined to comment through a spokeswoman, Heather McDonold. Vanguard spokesman David Hoffman did not immediately respond to a request for comment.
Fidelity Investments, whose Freedom Funds lineup invests in real estate and commodities but not hedge-fund style investment strategies, said “the exposure to the current asset classes in the funds allows us to best balance the risk and return preferences of shareholders, and liquid alternatives currently do not fit into this mix,” according to spokeswoman Nicole Goodnow.
Ms. Goodnow said the firm “regularly” reviews adding new asset classes and strategies.
Some advocates of alternatives say they can provide better diversification to long-term investors.
But Janet Yang, a Morningstar Inc. analyst, said the trend towards open-architecture hasn't tremendously benefited plan participants.
“Morningstar's research suggests that, on average, the higher fees needed to access non-proprietary managers in an open architecture lineup hasn't historically been rewarded with better returns,” said Ms. Yang.
She said managers without alternative investment strategies feel they can provide diversification through commodities, real estate or other lower-correlating asset classes.
