The (Relatively) Brighter Side
It has been 10 years since alternative investments burst onto the scene. In 2009, after the financial crash, they were the mutual fund story, gathering much of the industry’s headlines. Hundreds of alternatives funds were launched over the next several years. Exchange-traded funds followed suit, with offerings that ranged from staid to highly speculative.
The timing was poor; with one notable exception (more on that later), equities have since pounded all rivals. For stock-heavy investors, alternative investments have come in two flavors: 1) mostly useless and 2) thoroughly useless.

Tuesday’s column discussed the thoroughly useless alternative-fund categories. Today’s will cover the mostly useless. This is meant as a description of the past, not a prediction. Few alternative funds proved useful during a decade of stock market triumphs, but they might prove so over the next 10 years. Things change.

As with Tuesday’s column, each alternative investment will be listed by its Morningstar Category, along with its annualized rate of 10-year return, from the years 2009 through 2018. Also provided will be the number of times that the category average exceeded the S&P 500’s result during the three calendar years when stocks faltered: 2011, 2015, and 2108. The index barely broke even during the first two of those years and lost 4.4% during the third.

5) Precious Metals
Annualized returns: 3.9%, negative 3.4%; 0 for 3 against the S&P 500
There are two varieties of precious-metals funds. One consists of ETFs, which indirectly hold bullion--mostly gold--through futures contracts. Morningstar categorizes those funds as being commodities precious metals. That category gained an annualized 3.9% for the decade. The other group of precious-metals funds contains traditional, actively managed mutual funds that invest in mining stocks. Those funds, labeled equity precious metals, lost an annualized 3.4%.
Precious metals scraped into this column, rather than onto the thoroughly useless list, because the ETF category turned a profit. That was enough to place precious metals ahead of Tuesday’s funds, which couldn’t figure out how to make any money at all.  That doesn’t mean that precious-metals funds were much good. After blazing to a fine 2009-10 start, they frittered through the next eight years, including losses in all three years when stocks (relatively speaking) struggled.

The problem, if it can be called one, was the absence of inflation. When inflation is dormant, precious-metals prices tend to respond to industrial demand, which means that their funds aren’t particularly alternative. They require inflation to demonstrate their merits by diverging from the crowd. Should that event occur, precious metals will likely thrive once again. They are a reasonable, albeit highly volatile, complement to inflation-protected bonds.

4) Nontraditional Bond
Annualized return: 2.9%; 1 for 3 against the S&P 500
As with so many other alternative investments, nontraditional bond funds were developed to combat inflation. (All those dire 2010 predictions!) Traditional bond funds have positive durations, always, meaning that they can’t avoid losses when interest rates rise. Nontraditional bond funds attempt to be craftier. When interest rates are heading north, they can reduce their durations, in some cases even below zero (meaning that they directly profit from interest-rate increases.)

Or so the theory goes. In reality, it’s very difficult to time interest-rate movements and quite easy to be “nontraditional” by owning credit-sensitive securities instead of Treasuries. Which is what most funds in the category have done. They have behaved rather like high-yield bond funds, profiting in most years but struggling, as do all credit-sensitive securities, when the stock market falters. The category lost money in 2011, again in 2015, and once again in 2018 (although it did outdo the S&P 500).

Meaning that it wasn’t much of an alternative. In truth, I don’t regard nontraditional bond funds as alternative investments, not in the sense of diversifying a balanced portfolio. Most are solid investments, which is why they qualified for today’s column, but they should be thought of as bond funds, not as alternatives....
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