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Award for Biggest Bust of 2016 Goes To…

Ben Carlson provides us with his Financial Awards for 2016 which highlights the market’s top stories from the past year.  We agree with Ben’s sentiment that the “rising interest rate” environment is more of a mirage than a long-term trend.   We’ve added a line to his 10-yr Treasury yield chart to show that rates are barely up from 2015 levels.

This is actually the second year in a row that rates have risen. They went from 2.2% to 2.3% in 2015. While the latest moves may seem extreme, we would have to see a much larger move to be in an actual “rising rate environment” in my opinion. It could happen but people need to put these things in perspective and have a longer lookback period before jumping to conclusions.

Source:  A Wealth of Common Sense

We would also add a “Biggest Bust”category to the Financial Awards list.  The winner:  Alternative Mutual Funds.  These are mutual funds that mimic “hedge fund strategies” and were introduced post financial crisis to reduce risk in multi-asset portfolios.  Mutual fund offerings would allow retail investors to get exposure to previously unavailable hedge fund strategies.  The industry was touting the diversification benefits of alternatives to lure investors to these funds.  The reality has been a disaster for investors.

Alternative mutual funds have failed in their primary function of reducing risk due to their high correlations with global equity markets.  Alt. mutual funds have received push-back for their high fees and lackluster performance.  In an effort to make performance look “less bad”, they have increased equity exposure which eliminates diversification benefits.  The result is an expensive asset class (1.00-2.50%) that under-performs during up markets, doesn’t mitigate downside risk efficiently, and lacks transparency.  Unfortunately, many large banks and retail investment managers recommend 10%-15% in alt. mutual funds for diversified portfolios.  The result is a “dead asset class” that is a huge drag on total portfolio returns.

The alternative mutual fund industry is good at selling doom and gloom, but don’t fall for it.  In our opinion, the best way to hedge total portfolio risk is fixed income and cash.  If you hold alternative mutual funds I would ask your advisor to see the net of fee performance for the past 8 years (or since purchased).  Chances are you will be disgusted.  

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