SC Business Review Interviews Les Detterbeck: “Consider Alternatives!”

Press Release:  Tomorrow morning, May 23, at 7:50 a.m. ET on NPR/WSCI Radio (89.3) Mike Switzer will conduct his SC Business Review.  I will be his guest. The 6 minute segment was taped three weeks ago. The topic is “Liquid Alternatives.”  Please tune-in if you can.

Mike Switzer:  Hello and welcome to SC Business Review.  This is Mike Switzer.  As stocks continue their long-term upward trend, many are concerned about what will happen to their portfolios when the bull market ends.  Today, we are talking with Les Detterbeck, a wealth manager with Detterbeck Wealth Management.  Les is one of the few professionals in the country who has attained a CPA certificate, is a CFA charter holder and a Certified Financial Planner professional.  Welcome, Les.

Les Detterbeck:  Good morning, Mike.  It’s a pleasure to be with you this morning.

MS:  Les, the markets keep going up.  What happens when the bull market ends?

LD:  Mike, of course, no one can predict the future.  We will have a pullback, correction or crash sometime in the future. We just don’t when and how much.  Right now, we’re in the midst of the second longest bull market in history- 8 yrs and counting.  There is still optimism about tax reform, deregulation and infrastructure additions boosting the economy and the markets.

MS:  Yes, Les, but what are some of the concerns?

LD:  Mike, there’s been a recent ramping up of potential global conflicts, there is significant political risk both here and abroad, and stock valuations are at an elevated level, just to name some of the major ones.

Let’s remember what happened in 2008 when the financial crisis turned a bull market to a bear.  Equities were down 40-50%.  Most investors lost a major part of their portfolio.  However, prepared investors stayed invested and only lost 5-8%.  And, they didn’t have to climb out of a big hole when markets reversed in March 2009.  Many of these investors who did well owe their results to alternative investments, designed to participate in up markets and protect in down markets.

MS:  Les, what do you mean by an alternative?

LD:  Basically, these are not traditional equity or fixed income investments.  Alternatives provide diversification and therefore reduce risk and volatility.  They are not correlated to the equity market and therefore can provide a return even when stocks are not doing well.  For those investors whose primary focus is protection and secondary is growth, alternatives are a great addition to a portfolio.

MS:  Could you give us some examples?

LD:  Certainly.  Gold and real estate are alternatives.  They are not part of the traditional asset class of equities or fixed income.  Other examples are non-traditional strategies, such as market-neutral funds, arbitrage funds, and managed futures funds.  All designed to perform in both up and down markets.  New alternatives come to the marketplace regularly.  Recently we have reviewed and added to our client portfolios alternative assets investing in the global reinsurance industry and online consumer lending.

MS:  Les, tell us why and how alternatives work?

LD:  First, they provide increased diversification.  We all have heard “don’t put all your eggs in one basket.”  Second, lower correlation.  They don’t perform in lock step with stocks.  Harry Markowitz won a Nobel Prize by showing that combining assets which do not exhibit a high correlation with one another gives investors an opportunity to reduce risk without sacrificing return.  Studies, including those by the CFA, show that inclusion of at least 15% of alternatives can reduce the volatility and increase the returns of portfolios.  As a result, clients can get comfortable with their allocation and stay fully invested.  No need to try to time the markets-which is a loser’s game.

MS:  How did you get into alternatives and how are they used?

LD:  My son Brett and I started our business in 2000, the year of the dot.com bubble burst.  Stocks lost 15% and our clients did slightly better than that.  We didn’t take any solace in beating the S&P 500- our clients had lost money.  In 2001, the stock markets were again down and again, our clients lost money.  We realized we needed to find an answer- how do we protect our clients’ money and grow it as well?

We researched, reviewed and investigated everything we could find on alternatives. And, bought them ourselves so we could “test drive” them.  In early 2008, at a time somewhat like now, when valuations were high and there were concerns that the bull market might be ending, we knew it was time to prepare our clients for the end of the bull market.

We compiled and issued a report to them in January 2008 entitled “The Bubble Bust” which outlined our concerns about the coming end of the bull market and how alternatives could protect their portfolio.  We met with our clients and, in general, reduced equity allocations and substituted alternatives.  When the crisis came that fall, our clients were prepared.  Their overall portfolio losses were minimized.   Today, virtually all of our clients use three assets classes; equities, fixed income and alternatives.  Asset allocations vary by client and alternatives compose 15%-40% of a typical client portfolio.

MS:  Any final thoughts, Les?

LD:  If your focus is on protecting and growing your portfolio, consider adding liquid alternatives; designed to participate in up markets and protect in down markets.  In times like this, they can really reduce risk, increase returns and provide great peace of mind.

MS:  Les, thank you so much for visiting us today.  We hope you will join us again.

LD:  Mike, I will look forward to that.

Barron’s: “Investors Moving To Alternative Mutual Funds”

Alternative mutual fundsInvestors like hedge-fund strategies to manage portfolio risk. What they don’t like are the fees, lack of transparency, illiquidity, high minimums and lockup periods of hedge funds. Enter liquid alternative (“LA”) mutual funds. Assets in LA funds have grown three-fold in the last four years, while hedge fund assets have declined by 40%.

The Morningstar and Barron’s Alternative Investment Survey of U.S. Institutions and Financial Advisors identifies trends in alternative investing. Responses this year, as reported by Barron’s on May 26, 2012, show that “advisers are increasingly using mutual funds to get at alternative strategies and asset classes.” The report continued, “Investors are increasingly interested in anything not correlated with the stock and bond markets.These (LA) vehicles are viewed as a way to deliver additional, or even outsize, returns over conventional investment strategies.”

Barron’s report is no surprise to us. DWM was one of the early adopters of LA fund strategies. Back in early 2008, we encouraged clients to consider reducing their exposure to equities and substituting non-correlated, liquid alternatives. Many of these LAs held their ground in 2008 while equity funds suffered losses of 30% or more. We felt then as we do now- a traditional portfolio of stocks and bonds is not the answer alone. If your first goal is to protect your assets and the second to grow them, we suggest incorporating an appropriate mix of non-correlated LA investments to your portfolio.

The picture above represents a possible allocation for the DWM LA basket. It was established for the investor seeking less volatility and more absolute-type returns than the equity market. Holdings may include arbitrage funds, global tactical allocation funds, and market-neutral funds, among others. The model follows a “low beta” approach.  Low beta means returns that have little correlation to market risk and results. That being said, when there is a bull market, the performance of the model will most likely not be as great as a 100% stock portfolio. However, in a bear market, the model is geared to protect the downside.

The funds within the DWM LA portfolio are chosen to complement one another and together create a very powerful portfolio that can potentially excel in any market environment. We constantly monitor this dynamic LA area for offerings that may represent new opportunities for the DWM LA model and its investors.

Welcome aboard, Barron’s. It’s great to see a major, traditional investment publication recognizing the growth, value and importance of liquid alternatives.