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"...Funny, but its still rock and roll to me"

Good afternoon -

“Everybody’s talkin’ bout the new sound funny but it’s still rock and roll to me!”

This was a line from a Billy Joel song of the same name that many of us (now in our 50’s) sang in the early 80’s. We had no idea what it meant or was referring to then, but we emphatically belted it out! I heard it over the recent weekend (as a quick aside – it was not on any playlists of the 20+ members of the Penn State Women’s club lacrosse team who descended on our house - but more on that later)!

 

As we meet with new clients and prospects, one of our initial due diligence steps is to thoroughly review their existing holdings, the internal fees, and exactly what role each holding is playing in the portfolio. We are frequently seeing several holdings categorized as “Alternative Investments” …mostly on accounts coming from large National Broker Dealers. These holdings range from Managed Futures, Hedged Currency, Long Short Funds, Distressed Debt, etc. When asked, most investors (you know – the person who owns the money that’s being invested) have no idea what the holdings are, how they work, what role they play in a portfolio and just as importantly – how much they cost internally to own.

“My guy / lady tells me these will do well when the markets don’t” is what (after some nudging) we generally are able to lead the clients to admit – often coupled with a shrug. 

There is certainly plenty of quantitative and qualitative statistics that will illustrate these Alternatives Investments will in fact over time smooth out the volatility of a long-term portfolio and at times enhance returns. First a little background, Alternative Investments were initially created / introduced several decades ago for the Ultra High Net Worth ($50 million+) clients as a truly unique “boutique” satellite strategy to produce a more predictable return experience. Hefty fees were charged, but at that asset level, no one blinked.    

However, over time Alternative Investments as an asset class became more “main stream” – i.e. introduced to the retail investor as “the new sound” in the form of packaged high fee mutual funds or equally high fee separate investments requiring low initial $ commitments. Extensive marketing campaigns were built and during the years markets wobbled sales went thru the roof…as did fees generated! (BTW -who remembers the old Weebles commercials? “Weebles wobble but they don’t fall down!”). Most years these strategies move a few percent up or down – with most generating annual internal fees of at least 2+%. Periodically, on major market downward moves, Alternative Strategies will have banner return years. 

At the end of the day – the more I research the use of Alternative Investment strategies in investors’ portfolios – the more I firmly believe that shying away from the “new sound” and sticking to the “rock and roll” of investing will produce the long-term results “hits” that stand the test of time. Similar to how our kids marvel when we know the words to a remastered release of an old songs lyrics that one of “their music stars” has just pumped out, your portfolio will be well served to have its foundation built on the fundamentally sound approaches that have served investors well for decades – “the rock and roll”. 

In this authors opinion, employing a risk managed approach using a globally diversified portfolio of concentrated equity and fixed income mutual funds, Exchange Traded Funds and income generating strategies (which is basically a defensive risk mitigation strategy) coupled with the Patience and Processconcept I wrote about earlier this fall – should in most cases produce the long term results you are seeking while providing you with a far more easily understood, liquid and fee efficient strategy.

Its Still Rock & Roll To Me - lyrics

PS – Saturday evenings unlikely “last play of game” Penn State football victory over Iowa turned our house into a late, late night celebration by 20 of Meaghan’s PSU club lacrosse teammates. College is truly a young man’s game! Congrats to the girls on the win but most importantly the $1500 they raised for Children’s Cancer as part of the PSU national THON fundraiser.

Thank you for your time and confidence.

Douglas Birnie