Home' Trinidad and Tobago Guardian : May 10th 2015 Contents SBG10 STOCKS
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt MAY 10 • 2015
For most of us, invest-
ments fall into two sim-
ple categories: stocks or
bonds. Some investors
are adding an "other"
category in their search
for possibly safer or better returns.
They re pouring into what the industry
calls alternative funds, which are gen-
erally bringing hedge-fund-like strate-
gies to the masses. It s still a niche cor-
ner of the market, but nearly US$13
billion flowed into alternative funds
over the last year, according to Morn-
Still, there s confusion about what
these funds do and whether they re
worth the costs they charge over more
straightforward index funds. The Gate-
way fund is one of the largest and oldest
alternative funds in the market.
Managers MIKE BUCKIUS and PAUL
STEWART recently discussed their
fund s strategy.
They invest in stocks, like a traditional
stock fund, but they also buy and sell
options, which they use to steady
returns. Answers have been edited for
clarity and length.
What s the broad objective of the
Buckius: We own stocks because they
go up most of the time, and we do
some things on the management side
to smooth the ride out. We re trying
to get a decent amount of the return
with a lot less of the risk. That means
we have smaller losses in downturns
and shorter recovery periods. In bull
markets, we tend to lag, but we still
have positive returns.
You ve historically generated about
two thirds of the S&P 500 s returns,
but with milder swings. Wouldn t a
diversified portfolio, in which bonds
balance out the risk of stocks, be
Stewart: The thing is that the 10-
year Treasury yield is hovering around
two per cent (about half what it was
a decade ago). It s very difficult, nearly
impossible, for the bond market to
replicate the returns they had over the
last 10 years.
Buckius: We re not investing in
bonds, but the problem we re trying to
address is: How do I manage the risk
of my equity portfolio the way bonds
have historically done?
So the people coming into your
fund are moving money that had
been in bonds? Or are they selling
Buckius: I think a little bit of each.
People in our fund are a little more on
the conservative side, or they re older
and they don t have the time to accept
a three-, five- or seven-year time hori-
zon to recover their losses from a bear
Is there a wrong reason to get into
a fund like yours?
Buckius: If you think a market crash
is coming. We re there to cushion that,
but we re not betting against the mar-
ket. We expect the market to go up
over a long period of time. We just
don t want to ride the roller coaster.
So much focus recently has been
on keeping fees low. Your fees are
maybe triple what an S&P 500 index
Stewart: Yes, it s more expensive than
an index fund. There s no denying that.
But I would submit we re doing a lot
more work than an index manager.
When you talk with prospective
investors, where do fees rank in the
order of questions?
Stewart: Certainly not first. Maybe
third or below that. People are interested
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in understanding the process and
trying to understand where the
returns are coming from.
What kinds of markets are
best for your fund? When there s
a lot of volatility, because that
increases the price for the
options that you re selling and
means more income for you?
Stewart: If we can get upward
trending markets with high volatil-
ity buried within them, that s a
great environment. The first quar-
ter of this year was a good one:
The S&P 500 was up 0.95 per cent,
and the Y-share class of our fund
was up 1.15 per cent.
But last year you fell short of
both the S&P 500 and general
Buckius: Last year, except at the
end of the year, was a very low
volatility year. That meant the
income generated from what we
do was just low.
How much of a portfolio
should be in alternatives?
Buckius: We see people having
anywhere from 10 to 20 per cent
either in us or in a portfolio of two
or three alternatives. The thought
process behind that is you want
to have enough to make a differ-
ence, but you still want to have
exposure to traditional asset classes.
A more aggressive portfolio may
have 10 per cent in alternatives,
while a more conservative one may
have as much as 40 per cent.
Was it difficult to convince
your parents to invest in the
Buckius: I think our parents
probably fit the typical profile of
someone who invests in us. It
would be tougher to convince
someone who s 20 years old and
has all the time in the world until
they retire. If they have 30 years
or more, that s when they should
be taking risks.
Stock, bond and other
Making sense of alternative funds
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