Displaying items by tag: active management

Burton Malkiel is one of the pioneers of passive investing with his classic, “A Random Walk Down Wall Street”, introducing the concept to millions of people. In his current role as CIO of Wealthfront, he has spoken about the power of direct indexing to enhance after-tax returns. In a recent blog post, he remarked that tax-loss harvesting is “the only reliable way for investors to outperform the market.” 

With direct indexing, portfolios are regularly scanned for tax-loss harvesting opportunities. This enables investors to capture the advantages of passive investing while still availing themselves of the tax loss benefits of a more active approach. 

Malkiel notes that passive strategies outperform active 90% of the time, and active returns are even worse after taking taxes into consideration. He sees direct indexing working well, especially for investors who are periodically putting money to work in their accounts and during periods of heightened volatility. 

In terms of other tax considerations, Malkiel believes that Roth IRAs are the best investment vehicles for the majority of investors. He recommends dollar-cost averaging when investors are in the ‘accumulation’ phase but not necessarily for those drawing down funds. And he reaffirms that keeping costs low is one of the keys to long-term investing success. 

Finsum: Burton Malkiel, the author of “Random Walk Down Wall Street” is an advocate for direct indexing given its power to boost after-tax returns.

Fixed income investors have had to deal with considerable volatility over the past couple of years. The asset class has provided investors with generous yields between but has not lived up to its potential in terms of moderating portfolio volatility and serving as a counterweight to equities. 

In the near term, this volatility is likely to persist especially given uncertainty about the economy and interest rates. Due to these circumstances, fixed income investors should consider actively managed ETFs which are better equipped to navigate these conditions. Active managers are able to optimize holdings and take advantage of opportunities that are unavailable to passive managers. 

Not surprisingly, active bond funds have outperformed since 2022 when interest rate volatility started spiking. Yet, many advisors have been slow to embrace active fixed income ETFs. Some have stuck to actively managed mutual funds instead. According to Capital Group, 80% of assets in fixed income mutual funds are actively managed, while only 12% of assets in fixed income ETFs are actively managed. 

Actively managed ETFs offer advantages such as lower costs, more liquidity, and tax advantages. Capital Group attributes slow adoption to a lack of awareness of the benefits of active fixed income ETFs and limited supply among advisors. To this end, it’s investing in educating advisors about why they should consider actively managed fixed income ETFs over other options. 

Finsum: Active fixed income ETFs have many advantages over passive fixed income ETFs and actively managed fixed income mutual funds especially in the current environment. Yet, adoption has been slow for a few reasons.

With a strong recovery in fixed income over the past couple of months, fixed income fund managers are looking to generate inflows from the nearly $6 trillion that is sitting in money market funds. Some portions will certainly move into fixed income especially if interest rates start to move lower, and investors look to move further out on the curve to take advantage of still attractive yields.

Due to this, active fixed income funds delivered their biggest monthly returns in decades, leading to a surge of inflows. Recent economic data and chatter from FOMC officials have also been supportive of the asset class.

The challenge for managers is the explosion in active fixed income funds over the last few years, leading to price wars for market share and consolidation. Many are from the largest asset managers like Vanguard, State Street, and Blackrock, which have very low costs. Funds that aren’t able to sufficiently attract inflows over this period will only face more difficulties in the future in remaining viable. 

According to Rich Kushel, the head of Blackrock’s portfolio management group, “We are in a winner-takes-a-lot moment. If you’re truly adding real alpha, there will always be a place for you in this industry. For the folks who haven’t, you might as well buy [the benchmark].”

Finsum: There is nearly $6 trillion on the sidelines. Some of this will move into fixed income especially if rates start dropping. There will be intense competition among active funds to be a recipient of these inflows. 

Currently, fixed income investors can lock in yields that are in-line with the average, historical return in equity markets. According to David Leduc, the CEO, Insight Investment North America, this is a major reason we are in a new ‘golden age’ for bonds. 

Another reason to be bullish on the asset class is that most funds are deployed via passive strategies. This has increased liquidity and decreased transaction costs, while also leading to more inefficiencies which astute active managers can capitalize upon. 

Leduc believes that fixed income benchmarks are inherently flawed given that indexes are weighted based on debt issuance. The end result is that passive fixed income investors are overexposed to the most indebted companies.

In contrast, active managers can achieve alpha through careful selection in terms of value, credit quality, and duration. While passive funds invest in a relatively small slice of the fixed income universe, active managers have much more latitude in terms of securities to better optimize portfolios in terms of risk and return. One constraint for active managers is that some strategies are successful but can’t necessarily be scaled. Many err by simply sticking to duration positioning which increases near-term volatility.

Finsum: It’s a golden age for fixed income with bonds offering equity-like returns. Here’s why investors should favor active strategies especially as the risk of a recession grows.  

Aeon conducted a survey of pension funds, insurance asset managers, family offices, and wealth managers. Among the findings was that a majority plan to increase their allocation to active fixed income funds over the next 2 years. Currently, about 17% of respondents have less than 10% of their portfolios in active fixed income strategies, while 20% have between 50 and 75% of their portfolio in active fixed income. Overall, respondents are willing to trade liquidity for greater returns and diversification. 

The survey also indicates that 13% of respondents plan to ‘dramatically’ increase exposure, while 81% plan to do so ‘slightly’. In terms of return expectations, 55% are looking for between 3 and 5%, while 36% are looking for between 5 and 7%. 

In terms of alternatives, there was nearly unanimous consensus that the asset class would continue to grow as 74% see a slight increase over the next 2 years, while 16% see a dramatic increase. 

Another area of agreement is that these allocators are looking for fund managers with a ‘broad mandate’ to invest in several credit markets. The respondents also shared the view that they would be increasing allocation to private credit with 24% looking to ‘dramatically’ increase, and 67% seeing a slight increase. 

Finsum: Aeon conducted a survey of institutional investors. Among the findings was a consensus agreement that allocations to active fixed income strategies would materially increase over the next 2 years.