Advisors intent on creating returns for their clients are turning to alternative investments, according to “The Cerulli Edge – U.S. Monthly Product Trends” released today.
Although the market for traditional stocks and bonds has been facing challenges in recent months, some alternative investment asset classes have been seeing spikes in returns, said Cerulli, a research firm based in Boston.
Unlike some other asset classes, non-traded real estate (NTRs); interval funds, which have high yields in exchange for illiquidity and high fees; and business development companies (BDCs) have made money for investors, the firm said.
NTRs, interval funds and BDCs held almost $300 billion in assets at the end of 2021, a steep increase over the $176 billion at the end of 2020, Cerulli said. The growth was driven by strong sales of Blackstone offerings.
“While brand is exceptionally important in a segment where investment selection truly matters, a wider range of managers will be able to compete based on the provision of specialty or niche exposures, distribution strength, and, to a lesser extent, fees,” Cerulli said. “Intermittent liquidity products remain expensive and require careful evaluation for suitability by home offices and advisors.”
Mutual fund assets were relatively flat in March and are down more than 6% from the end of 2021, the report said. Mutual funds have a higher relative concentration of fixed-income assets, so it has been challenged by falling bond prices, evidenced by a 5.9% drop in the U.S. Aggregate Index during the first quarter of 2022, Cerulli said.
Only the alternative mutual fund asset class, which held a total of $3.6 billion, managed to gather positive net flows during March, the firm said. Cerulli also noted that ETF assets jumped nearly 3% in March “thanks to a broad equity market rebound during the month, as well as $97.2 billion in net flows. Over the course of the first quarter, the alternative mutual fund asset class added just less than $200 billion in net flows, although assets remain down 2.4% from the highs reached at the end of 2021.”
A survey of financial advisors taken by Cerulli last year showed that more than 90% of advisors were “at least somewhat” focused on helping their clients generate income. Alternatives were one of the avenues taken to create that income. Fifty-nine percent of advisors who said they were using alternatives said creating current income for clients was their goal.
Current income was also reported as a goal of asset managers who said they were using alternatives, including both illiquid and liquid alternatives. Another avenue through which advisors said they looked for alternative income was nontraditional bond funds, Cerulli said.