(PUB) Investing 2016

9

March 201 6

Morningstar FundInvestor

strategies that provide true diversification in the sense of lower correlations and betas to traditional asset classes; parent firms with a legacy of keeping share- holders’ interests in mind; and lower fees. And while alternative funds are most often sold through advisors, many are available through retail fund platforms. Here are a few of our favorite multialterna- tive funds that are accessible to individual investors. Multistrategy: Within the multistrategy subgroup, we recommend two Bronze-rated multimanager funds, Litman Gregory Masters Alternative Strategies MASFX and John Hancock Alternative Asset Alloca- tion JAAAX . Both are headed up by teams with extensive experience vetting managers and putting together portfolios in the mutual fund arena. Litman Gregory uses a fund-of-hedge-funds structure, taking a fairly concentrated approach with only five sub- advisors, while John Hancock uses a more diversified fund-of-funds structure. Global Macro: Bronze-rated John Hancock Global Absolute Return Strategies JHAAX , subadvised by Scotland-based Standard Life Investments, has become one of the largest alternative mutual funds, with $9 billion in assets under management in the United States and more than $75 billion across its worldwide vehicles. The flagship strategy has a record going back to 2008 , and lead manager Guy Stern has been on the strategy since then, though the team has endured significant turnover. Stern is backed by a deep, 50 -person analyst team that develops trade ideas designed to be profitable over a three-year period. Hedge Fund Replication: Bronze-rated Natixis ASG Global Alternatives GAFAX features at its head one of the leading academic researchers on hedge fund replication, Andrew Lo, also a co-founder of AlphaSim- plex Group. The quantitative team running the fund seeks to replicate the asset-class exposures (or betas) of the hedge fund industry by regressing the returns from several major hedge fund databases. The team constrains positions to achieve an 8% volatility target and employs a proprietary stop-loss system to manage downside risk. K Contact Josh Charlson at josh.charlson@morningstar.com

Multialternative Category 3-Year Performance Statistics

3-Yr Total Return%

3-Yr Std Dev

3-Yr Sharpe Ratio

Max Draw- down

Down Capture Ratio

Jan 2016 Return%

3-Yr Corr%

3-Yr Beta

Category

Multialternative

-1.55

0.69

0.88 0.28

3.51 0.07 -6.18

41.82

Benchmarks Barclays US Agg Bond

1.38

2.15 -0.05 -0.01

2.96 0.68 -3.67

-4.85

S&P 500

-4.96 11.30

1.00 1.00 10.94 1.18 -8.36 100.00

MSCI World

-6.05

3.59

0.96 0.99 11.31 0.60 -12.20 122.83

60 40 Blended Benchmark -3.02 67.44 *Data through 01/31/16. Correlation and Beta are to the S&P 500. Blended benchmark consists of 60% MSCI World 40% Barclays U.S. Agg. 4.73 0.93 0.59 6.94 1.00 -6.27

provide diversification from standard asset classes. Some funds in the category—particularly global- macro managers—do tend to take on more market exposure and higher volatility, depending on their current views of the economy and markets. Results have been mixed so far, however. A bright spot for the category has been its decent downside protection, reflected in its moderate beta (a measure of equity sensitivity) of 0 . 28 and three-year downside capture ratio of 42% . In January 2016 , when global markets were tanking, this category held up well: While the MSCI World Index lost 6 . 00% , the multialternative category lost 1 . 55% . The category does carry market exposure and is not immune to losses, but many funds have shown that they can fulfill their role as diversifiers. Returns in up markets, however, have been dismal. The multialternative category’s average annualized return during the past three years through January 2016 was a marginally positive 0 . 69% . It’s not surprising that the category would trail the S & P 500 ( 11 . 3% ) by a significant margin, but on a beta- adjusted basis, the lag is greater than expected. More- over, the fund trails both the conservative-allocation category (slightly) and a blended 60 / 40 MSCI World/ Barclays Aggregate benchmark (more pronouncedly), though its volatility (based on standard deviation) has been lower than both. Multialternative Recommendations When assigning Morningstar Analyst Ratings to funds in the multialternative category, Morningstar analysts emphasize established management track records running the strategy or similar versions;