While alternative mutual funds had record inflows and the largest number of fund launches last year, the top reason keeping advisors from investing in the asset class is fees, a Morningstar and Barron’s survey found.
Since 2009, the average equally-weighted expense ratio on alternative funds has come down from 1.88 percent to 1.78 percent today, according to Morningstar data. In comparison, the average stock fund charges 1.31 percent today, and the average bond fund charges nearly 1 percent. Fees reached their lowest for alternative funds in 2013, at 1.74 percent.
The 2013–2014 Alternative Investment Survey of U.S. Institutions and Financial Advisors was conducted in March by Morningstar and Barron’s, and asked 300 advisors about their use and perception of alternative investments. Nearly half of advisors said fees were a top concern and the reason they are hesitant to invest in alternatives. Forty percent said lack of liquidity was a major issue.
But when selecting an alternative product, manager and/or team experience with the asset class was the top factor in advisors’ decision-making (17 percent). The second most important factor, with 14 percent of advisors choosing it, was fees.
Alternatives are, of course, still relevant to advisors, with 57 percent saying that they were as important or more important than traditional investments. But interest may be waning, Morningstar says. In 2010, 15 percent of advisors cited alternatives as “much more important” than traditional investments, but that has dropped to 3 percent this year.
In 2010, more than half of advisors said they planned to boost their allocations to alternative by more than 10 percent per year, compared to only 39 percent this year.