How to Talk with Clients About Non-Correlated Asset Classes

Adding a non-correlated/negatively correlated asset class to your client’s portfolio can serve as protection. When the equities market rises, these are assets that are almost certain to underperform. But when the market turns—and it can turn quickly as we have seen recently—these non-correlated assets demonstrate how valuable they are.
The challenge for financial advisors with this lies within client education—helping the clients that can benefit from these asset classes understand their benefits and to position these non-correlated strategies within their client’s portfolio properly.
One asset class that is frequently overlooked by financial advisers is managed futures. These are funded that are often looked at as using opaque strategies that are hard to explain to clients and expensive to plan out and execute. Over time, there’s been a little truth to this—the strategies can be complex, and some of the funds include layers of fees that aren’t always obvious to the investor.
For example, there are some managed futures funds that have published expense ratios reaching the 2-4% range—that often doesn’t include any additional fees paid to offshore ‘sub-advisers.’
Recently, we’ve all been reminded that markets move in both directions—this is making an even stronger case for non-correlated asset strategies that are placed in a portfolio that has been carefully constructed to meet client’s needs and goals. There’s any number of ‘alternative’ funds that position themselves as offering downturn protections, but managed-futures funds provide a different level of protection as they are often investing in many different asset classes (currencies, commodities, and bonds, for example). This asset class diversification is the reason behind their description as a source of ‘crisis alpha’—the latest market dip supports this.
There are several things that financial advisors who are considering adding these products to their client portfolios should watch for.
Some managed-futures funds use excessive leverage—resulting in large swings in NAV that can be unsettling for investors. In other cases, there’s little transparency into how the strategy is being executed. Also, not all funds pursue strategies that are designed to maximize the benefits of low or even negative correlation to equity markets.
The best plan is to pursue diversified, rules-based, trend-following approaches to providing the best long-term outcome for clients.
Bottom line, a financial advisor who takes a thoughtful, holistic approach to risk management and asset accumulation/return in portfolio construction might consider including managed-futures funds. These aren’t just for high-end clients—whether the client has $5,000 or $5, these funds have an important role to play. Financial advisors may have to do some convincing in the middle of a bull market, but when stocks turn down, your clients may thank you.