One persistent challenge for financial advisors is communications around annuities. According to a new research report from the Center for Retirement Research at Boston College, many advisors forgo recommending annuities to clients due to these concerns even when there is a risk that a client may outlive their funds. Additionally, advisors also report that clients often don’t take their advice when it comes to buying annuities which is one possible explanation for advisors’ reluctance.

The research report explores the question of why Americans don’t buy annuities despite the ubiquitous fear of running out of money during retirement and the desire to shield investments from volatility. 

Currently, only about 10% of older Americans have purchased an annuity. The research identifies a major issue as advisors are unlikely to recommend annuities and even when these recommendations are made, clients are unlikely to act on it.  

The research suggests that the issue is less about understanding the complexities of the product. In fact, most households with assets over $100,000 were either not familiar or only ‘somewhat familiar’ with annuities. Thus, there needs to be more awareness about annuities and the process of buying one needs to be simplified. Advisors should seek to clarify the steps involved and explain the decisions that need to be made.

Finsum: Americans have very low ownership rates of annuities. This is despite the common fear of running out of money during retirement and concerns that market volatility could impact investments. 

Two of the largest domestic natural gas producers and leaders in shale production, Chesapeake Energy and Southwestern Energy, have agreed to merge in a $7.4 billion deal. This continues a wave of M&A activity in the energy sector. For 2024, this is expected to continue given that many companies are flush with cash, while valuations are also attractive.

The merger is an all-stock transaction and is expected to close in the second quarter. According to Chesapeake CEO Nick Dell’Osso, the merger will enable them to compete on an international scale and lead to lower costs. The new, combined company will have a new name and a market cap of around $24 billion. It forecasts 15 years of inventory and expects a 20% increase in dividends due to “significant synergies” and an increase in free cash flow generation over the next 5 years. 

Last year, there were a handful of deals in the sector as ExxonMobil bought Pioneer Natural Resources for $60 billion, while Chevron bought Hess for $53 billion. Both companies were looking to boost production capacity. In 2024, analysts are forecasting that major energy producers will be looking to acquire high-quality shale holdings in public and private markets.

Finsum: Chesapeake Energy and Southwestern Energy agreed to a $7.4 billion merger. Analysts are expecting more M&A activity in the sector in the coming year.

There’s a major drawback to today’s hyper-connected world where investors are constantly receiving financial advice that is mostly short-term and doesn’t necessarily have the investors’ best interests in mind. Contrast that approach to a long-term, fundamental based approach that is based on timeless principles rather than impulsive thinking.

Recently, there has been a narrative that individuals should be buying individual bonds. Adam Abbas, a portfolio manager at Oakmark Funds, pushed back against this notion and made the case for why most investors are better off with mutual funds and ETFs. 

He acknowledges that bonds look very appealing given where rates are relative to historic levels and that default rates for high-quality securities are likely to remain low. However, the risk climbs when investors start ‘reaching for yield’ which tends to happen with individual investors. Therefore, some sort of comprehensive credit analysis is required from a bottom-up perspective. 

Further, most individual investors will not be able to sufficiently diversify their portfolios. This means that their portfolios would be damaged by a corporate bond default. In addition to understanding companies, investors also need to have a grasp on the macro picture as factors like inflation or rate policy can also impact returns. 

Given these difficulties, most investors are better off choosing an astute active manager to invest in bonds as they will conduct proper due diligence and ensure that portfolios are sufficiently diversified. 

Finsum: There’s a trend of individual investors buying individual bonds. Oakmark’s Adam Abbas pushes back against this and makes the case for why most investors are better off with a mutual fund or ETF. 

According to a survey conducted of attendees at the VettaFi Income Strategy Symposium, 60% are looking to add fixed income ETF exposure from cash and/or equities. This aligns with the view of fund managers on the panel who also believe that the Federal Reserve is near the end of its hiking cycle. 

John Croke, Vanguard’s head of active fixed income product strategy, commented that this is a good time to invest in fixed income. He sees the economy heading for a mild recession in the middle of the year despite the better than expected, recent Q3 GDP figures. He agreed with attendees that the hiking cycle is in its final innings and believes that the Fed funds rate will be closer to 4% rather than 5%. 

For investors looking to up their fixed income exposure, he recommends an ETF such as the Vanguard Total Bond Market ETF (BND). BND offers exposure to a diversified basket of investment-grade, US debt. He also recommends the Vanguard Ultra-Short Bond ETF (VUSB) for investors looking to exchange cash for bonds. VUSB is composed of a diversified basket of high-quality and medium-quality bonds with an average maturity between 0 and 2 years. 

Finsum: According to a survey of attendees at the VettaFi Strategic Income Symposium, 60% of advisors are looking to increase their fixed income ETF allocation in 2024. 

Allworth Financial manages $19 billion in client assets. Recently, Allworth CIO Andy Stout shared the firm’s approach to managing model portfolios for clients. The firm has a scorecard in which it quantitatively evaluates all investable mutual funds and ETFs. It follows up by having conversations with managers of funds with high marks to see if their process is ‘repeatable’ prior to investing.

Allworth’s core portfolio is a 60/40 mix between equities and bonds, respectively. The equities side is composed of 48% US stocks and 12% international. The fixed income side is a combination of short-term fixed income funds, investment grade, total return funds, and a handful of active funds.

Allworth believes in spreading allocations between multiple asset managers. For instance in its core portfolio, they use SPDR, Vanguard, Blackrock, and JPMorgan. When it comes to fund selection, the firm looks for securities that are equipped to navigate the entire business cycle. Stout also noted that consistency is valued more since success is more about ‘avoiding strikeouts’ than hitting a home run. In terms of risks, he sees recession risk as remaining elevated and thus favors more defensive sectors and investments.   

Finsum: Allworth Financial CIO Andy Stout shared the firm’s approach to model portfolios, and what opportunities and risks he sees at the moment.