Alternative Investments

InvestmentNews, an online publication for investment advisers, reported that Vanguard, the champion of low cost investing, is looking for greater exposure to alternative investments. You may read the whole article here.

The Vanguard Group Inc., a longtime champion of low-cost, passive mutual funds, is weighing a more aggressive push into alternative investments.

The company's consideration of investments outside traditional stocks and bonds is being driven mainly by demand from financial advisers. Since the 2008-09 stock market downturn, advisers have been relying more heavily on alternative investments as a way to reduce risk and volatility in their clients' portfolios

Despite the popularity of nontraditional assets, Vanguard isn't looking to jump too deeply into the alternatives pool. Instead, it is considering products aimed more at reducing risk and volatility than boosting performance.

In a time when the VIX, a common measure of stock market volatility, is languishing near the low end of its historical range and  the year 2012 had been one of the least volatile in history, investors still clamor for even lower volatility. In a time when stocks have more than doubled in value from the lows of 2009, investors are still exiting stock funds and pouring into bond funds.

Of course, Vanguard already has alternative funds in its lineup. One of them is a market neutral offering. Here is what the same article had to say,

Vanguard has proved that it is capable of running fairly sophisticated strategies on the cheap. For example, the Vanguard Market Neutral Fund (VMNFX), which it launched in 1999, has an expense ratio of 0.25%, significantly less than the 1.75% charged by the average market-neutral fund.

 

The fund has stumbled, however, in terms of performance. The Vanguard Market Neutral Fund, which was subadvised by Axa Rosenberg Group LLC for more than a decade before being taken over by Vanguard in 2010, has five-year and 10-year annualized returns of -2.69% and 1.09%, respectively, putting it in the bottom-10th percentile of the market-neutral category.  

It always seems odd to me that someone would try to construct a stock portfolio to produce bond like return. Is that what bonds are for? The result predictably failed to beat neither stocks nor bonds.

The sheepish behavior of investors over the past few years is quite understandable. After all, we had two stupendous stock market crashes over the past 12 years and stocks have delivered the most meager return over this period. However, 12 years ago, stocks were adulated and worshiped. It was afforded such a sky high valuation that essentially robbed the abysmal 2000's to pay for the abundance of 1990's.

In the world of investing, chasing glamour is hazardous to your wealth, that includes the so called alternative investments.