Annual Survey Finds Continued Rise of Mutual Funds as Vehicle of Choice for Alternative Strategies; Long-Short Equity Garners Most Investor Interest for Fourth Year in a Row

July 7, 2014

CHICAGO, July 7, 2014 /PRNewswire/ — Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, and Barron’s, the financial magazine published by Dow Jones & Co., today released highlights of their annual national survey examining the perception and usage of alternative investments among institutions and financial advisors. This survey is now in its eighth year.

“Mutual funds continue to grow as the vehicle of choice for accessing alternative strategies. 2013 marked the strongest asset flows into alternative funds and the largest number of fund launches on record,” Josh Charlson, director of manager research, alternative strategies, said. “For the fourth year in a row, long-short strategies garnered the most interest, but growing apprehension toward the bond market has also contributed to blistering growth in nontraditional bond funds.”

Morningstar and Barron’s conducted the survey in March 2014 and received responses from 372 institutions and 301 financial advisors. Among the major trends in alternative investment usage and perception:

Long-short equity strategies continued to lead the way; interest also turning to multialternative and nontraditional bonds

    --  Organic growth rates for mutual funds rose to eye-popping levels.
        Long-short equity funds rose by more than 80 percent in 2013, followed
        by nontraditional bond and multialternative funds. Advisors and
        institutions both cited long-short equity and multialternative as top
        strategies for investment over the next five years.
    --  Assets surged in the nontraditional bond category in 2013 as more than a
        quarter of advisors cited a poor bond market outlook as a principal
        reason to invest in alternatives. Advisors and institutions indicated,
        by a significant margin, that they valued fixed income alternatives more
        for their low correlation than their yield and interest-rate hedging.

Mutual funds accelerate as vehicle of choice for alternative strategies; investments concentrated in few funds

    --  Mutual funds continued to make gains across the board as a preferred
        means for accessing alternative strategies. Mutual funds jumped to 73
        percent from 57 percent in last year's survey as the stated vehicle of
        choice for advisors to access long-short equity or debt strategies and
        to 48 percent from 32 percent for institutions accessing managed futures
    --  Assets in alternative mutual funds are extremely concentrated. As of May
        2014, almost half of all alternative mutual fund assets in Morningstar's
        database were concentrated in the 10 largest funds.

Still interest and perceived value in alternatives, but enthusiasm may be moderating; fees remain a concern

    --  Alternative investments remain important for both advisors and
        institutions with more than half indicating that they were as important
        or more important than traditional investments, but enthusiasm may be
        cooling. Fewer institutions and significantly fewer advisors cited
        alternatives as "much more important" than traditional investments in
        this year's survey than they did in 2010.
    --  After record inflows into alternatives in recent years, growth in
        alternatives may start to ease, especially for advisors. In the 2010
        survey, more than half of advisors said they expected to increase their
        allocations to alternatives by more than 10 percent per year; only 39
        percent said the same this year.
    --  Advisors and institutions say the biggest sticking point for buying
        alternative investments is still their relatively high fees.

Manager experience trumps “skin in the game” when it comes to investment selection; standard benchmarks still the standard

    --  When selecting alternative products, both advisors and institutions
        agree that manager experience trumps other evaluation metrics, such as a
        manager's investment in the strategy and the amount of a firm's assets
        in alternatives. Institutions also placed emphasis on investment process
        while advisors were more concerned with fees.
    --  Suggesting that there is opportunity for new players to enter the
        alternatives space, only about 6 percent of both advisors and
        institutions said they consider a firm-wide core competency in
        alternatives an important factor in selecting a strategy.
    --  Surprisingly, standard benchmarks, such as the S&P 500 Index, are the
        most common forms of alternatives benchmarking. Peer groups and
        risk-adjusted analysis follow close behind as benchmark options.

Highlights and commentary from the survey appeared in the July 7 issue of Barron’s. The complete survey results, including charts, can be viewed here. In addition, on July 22 at 1:00 pm CDT, Morningstar experts will host a webinar to discuss the major findings of the survey. Click here to register for the webinar.

Morningstar has approximately 5,500 active hedge funds and funds of hedge funds in its database as well as 780 alternative mutual funds and ETFs. Morningstar analysts cover about 70 percent of mutual funds in the alternative category by assets. The company also offers a family of alternative indexes. Through its recent acquisition of ByAllAccounts, Morningstar aggregates financial account data for alternative investments and delivers it directly to portfolio accounting platforms. Click here to request more information about ByAllAccounts’ alternative investment aggregation. Hedge fund investors, managers, consultants, and advisors can research alternative strategies through Morningstar Direct(SM), the company’s global research platform for institutions.

About Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 456,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 12 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $164 billion in assets under advisement and management as of March 31, 2014. The company has operations in 27 countries.

©2014 Morningstar, Inc. All Rights Reserved.


Media Contact:

Alexa Auerbach, +1 312 696-6481 or alexa.auerbach@morningstar.com

SOURCE Morningstar, Inc.

Source: PR Newswire

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