One thing steady about the market: volatility
Volatility? For at least the immediate future, when it comes to the market, it seems to about the only stable thing going.
Volatility’s on pace to remain on the high side – with the volatility index averaging about 25, according to jpmorgan.com. As the Fed over squeezes into weaker fundamentals, the S&P’s expected to again test last year’s lows.
“In the first half of 2023, we expect the S&P 500 to re-test the lows of 2022 as the Fed overtightens into weaker fundamentals. This sell-off combined with disinflation, rising unemployment and declining corporate sentiment should be enough for the Fed to start signaling a pivot, subsequently driving an asset recovery and pushing the S&P 500 to 4,200 by year-end 2023,” said Dubravko Lakos-Bujas, global head of Equity Macro Research at J.P. Morgan.
“We all know it’s been a tough year for investors. We’ve been through monetary tightening and persistent inflation across global economies,” said Ryan Murray, CFP, with Vanguard. “We’ve seen an unprecedented period of volatility in the bond market, where such fluctuations are highly unusual.”
Give the inherently unpredictability of markets, in the face of extreme volatility, shucking aside your long term plan will certainly cross the minds of investors, he noted. “But it’s important not to let emotions get the better of you or push you to make a reactive decision that could put your hard-earned savings at risk.
Fund Selectors Enhancing Model Portfolio Offerings
According to survey findings published by Natixis Investment Managers, fund selectors are enhancing their model portfolio offerings. Natixis surveyed 174 investment professionals in North America who are responsible for their firms’ top-of-the-house selection of funds into which $18.7 trillion in client assets are invested among private banks, wirehouses, registered investment advisors, independent wealth managers, and other advisory firms. The findings are part of a larger global survey of 441 professional fund selectors, which was conducted in December 2022. Based on the survey results, fund selectors are enhancing their offerings because model portfolios help to streamline the investment management process (86%), enable advisors to spend more time addressing client needs (82%), and help to ensure a consistent investment experience for clients (77%) while managing risk exposure for the firm (78%). They also agree that heightened market volatility is accelerating advisors’ use of model portfolios (65%), while models enhance the alpha potential for their clients (62%). The survey also found that 58% of fund selectors are finding a greater need for specialty models to complement the core models that advisors use for building client portfolios. The types of specialty models include models with enhanced customization tailored to high-net-worth clients (46%), models with a focus on alternatives (42%), income generation (43%), tax management (38%); sustainability (34%), and thematics (28%).
Finsum:Based on the results of a Natixis survey, fund selectors are enhancing their model portfolio offerings to help to streamline the investment management process, and enable advisors to spend more time addressing client needs, while managing risk exposure for the firm (78%).
BP’s CEO Warns of Price Spikes If Supply is Cut Too Quickly
With ESG investors pressuring companies to transition to sustainable businesses, BP’s chief executive Bernard Looney is warning that the energy transition needs to happen in an orderly fashion or else oil and gas prices will spike if supply is cut too quickly without a drop in demand. Looney stated the following at the recent International Energy Week event in London, "Reducing supply without also reducing demand inevitably leads to price spikes – price spikes, leads to economic volatility." He added that we need, “Affordable energy flowing where and when it's needed... Investing in energy security and the energy transition. This is Looney’s second warning for the need for an "orderly transition.” In early February, he stressed "an orderly" transition when he announced that BP would be producing more oil and gas for longer, and now aims for a fall of 20% to 30% in emissions from the carbon in its oil and gas production in 2030 compared to a 2019 baseline, lower than the previous aim of 35-40%. At the London event, he also noted that “People today want an energy system that works. That provides secure, affordable, and low-carbon energy - what the Energy Institute calls the triple energy crisis."
Finsum:At a recent energy event in London, BP CEO Bernard Looney warned for the second time that the energy transition needs to happen in an orderly fashion or else oil and gas prices will spike.
Active Managers Make Use of Narrow Slices of Fixed Income Market
The strong demand for bonds this year has led to a windfall for BlackRock’s fixed-income exchange-traded funds. The fund giant has attracted more investor cash since U.S. rates started rising than all of its competitors combined. The inflows to fixed-income funds are being driven by regulatory changes and creative uses by wealth managers and other bond funds. Deborah Fuhr, the founder of the ETFGI consultancy, told FinancialTimes that “There have been significant changes about the way people think about fixed-income ETFs in the past year. We have seen large funds and asset managers put their portfolios in ETFs . . . rather than buying bonds and trying to manage them themselves.” Salim Ramji, BlackRock’s global head of ETF and index investments added, “We’re finding and expanding into all parts of the bond market in multiple different slices . . . Any part of the bond market that can be accessed through an ETF, we’re capturing that.” This includes ETFs such as IBTG, which only holds U.S. Treasury bonds maturing in 2026. Another fund is LQDB, which purely contains BBB-rated corporate bonds. These ETFs allow active fund managers to use them in different ways. For instance, some use a specific slice to tilt their portfolio either to longer or shorter-duration bonds, which depends on their view of the economy. Ramji also noted that BlackRock ETF users include nine of the ten largest active managers and eight of the ten largest U.S. insurance companies.
Finsum:As demand for fixed income increases, Blackrock has created ETFs that track a small slice of the bond market that active managers can use in a variety of ways.
Fund Firms Looking to Capitalize on Growing Interest Fixed-Income
Several fund firms are looking to expand their fixed-income product lines to take advantage of the growing interest in the asset class. Fixed income had experienced a couple of turbulent years as the Federal Reserve's rate increases impacted yields and made equities more volatile. Plus, actively managed fixed-income mutual funds experienced one of their worst years on record in terms of outflows. However, the demand for fixed income this year appears to be gaining steam with several firms positioning themselves to take advantage of this trend. For instance, BlackRock has been rolling out new products to meet fixed-income demand. In January, the firm launched the BlackRock AAA CLO ETF, which has already taken in more than $30 million in assets as of Feb. 21st. Plus, last year, BlackRock launched a first-of-its-kind series of fixed-income ETFs that are designed to provide access to buy-write investment strategies on baskets of fixed-income securities. According to Steve Laipply, U.S. head of iShares Fixed Income at BlackRock, “The theme here is building out different tools for investors to navigate the environment so you continue to see this floating rate theme across the credit spectrum.” The firm is eyeing additional products in the future. Laipply also added that the industry will begin to get more creative when it comes to rolling out new products in the fixed-income space.
Finsum:After a couple of turbulent years, fixed-income funds are seeing increased demand, leading fund firms to take advantage of the trend by launching new products.