Displaying items by tag: risk

Sunday, 02 June 2024 19:32

How Model Portfolios Can Be a Win-Win

The nature of being a financial advisor has shifted significantly over the past decade. It’s gone from being centered around selecting investments and managing portfolios to financial planning and client service. Model portfolios have been ascending along with this evolution and are forecast to exceed $1 trillion in assets over the next decade.

According to surveys, clients invested in model portfolios are more likely to have higher levels of trust with their financial advisors and believe that volatility is an opportunity to grow assets. Additionally, they are more likely to be interested in other services offered by an advisor. They can also help in terms of aligning the interests of advisors, the firm, and clients. They also free up time and energy for advisors to spend on factors that ultimately drive success for advisors, like client service and prospecting. 

Another benefit is that model portfolios provide an extra layer of due diligence, with 77% of advisors saying that they help with managing risk. In essence, it gives clients access to a higher quality of investment management and a more comprehensive relationship with an advisor.

Models also mean that advisors’ services become more scalable, enabling growth and expansion. In recent years, models have expanded to include offerings from third parties and a wider array strategies, which means there are possibilities for endless customization to fit clients’ unique needs and goals.

Finsum: Model portfolios bring the promise of a win-win for clients and advisors. Clients invested in model portfolios report higher levels of confidence with their advisor and don’t fear volatility. For advisors, they offer the ability to decrease time spent on investment management and focus more on client service and prospecting.

Published in Wealth Management

Active bond funds are essential for a well-diversified investment portfolio, providing income and cushioning against market downturns. In 2022, bonds demonstrated their resilience, with most fixed income categories performing better than the broader stock market. However, bond values are inversely related to interest rate changes, so with rates projected to rise, focusing on short- to intermediate-term bond ETFs is advisable. 


Active bond ETFs, such as Pimco’s Active Bond ETF (BOND), offer diversified exposure and professional management, helping investors navigate volatile markets. If you want to shorten the duration Pimco’s Enhanced Short Matruaity Active ESG ETF (EMNT) might provide a more robust alternative with ESG exposure. 


Despite higher costs, active management can be beneficial, especially in uncertain economic conditions, making these funds a strategic addition to long-term investment portfolios.

Finsum: Duration risk is especially important in this current climate and because interest rates could fall quickly in the next year depending on the Fed’s decisions.

Published in Wealth Management

Recent fluctuations in the market have fueled investors' desire for strategies that mitigate risk. Defined-outcome exchange-traded funds, also known as "buffer ETFs," have emerged as a solution, aiming to protect investors from losses on a designated index. 


The proliferation of these funds has been remarkable, with assets ballooning to over $22 billion from under $200 million in 2018, with 169 offerings available presently. These ETFs typically offer index returns while mitigating downside risk, achieved by sacrificing a portion of potential upside gains. 


By employing various options structures, such as funds with upside caps or partial upside exposure, investors can tailor their risk-reward profiles according to their preferences. Despite operational nuances and fees, most of these ETFs have demonstrated their ability to shield investors from market downturns while offering competitive returns.

Finsum: These last five years have been critical examples of why many investors need buffer ETFs to both capture gains and hedge losses. 

Published in Wealth Management

The IMF estimates that the private credit industry is now over $2 trillion in size, with 75% of it located in the US. It now rivals the leveraged loan and high-yield credit markets in size. Private credit offers borrowers more speed and flexibility and provides higher returns and less volatility to investors. 

While the advantages are clear, the IMF warns that as lending moves away from regulated financial institutions to private markets, systemic risks will increase. With private credit, there is less transparency, price discovery, and information about credit quality. Additionally, there is less information about how various players in the ecosystem are connected. Therefore, the IMF doesn’t see near-term risks but believes that as private credit keeps growing, there will be a need for greater regulation. 

On average, private credit borrowers tend to be smaller and have weaker balance sheets than companies raising money through syndicated loans or public markets. This means more downside risk in the event of rising rates or a negative economic shock. 

Currently, the IMF estimates that ⅓ of private credit borrowers’ financing costs are higher than earnings. It also warns that lending standards have weakened amid increased competition among lenders due to the influx of capital in the sector. 

Finsum: The private credit industry has experienced rapid growth over the last few years and now rivals the size of the high-yield credit and leveraged loan markets. Here’s why the IMF is concerned that continued growth could lead to systemic risks to financial stability.

Published in Alternatives

The number of alternative investment options continues to increase, and many now consider it an essential ingredient to optimize portfolios. However, there are significant challenges that come with evaluating these investments, given that there is more complexity and advisors have less experience with the asset class.

The benefits of alternatives are higher returns, especially in high-rate, high-inflation environments, and less correlation to equities and bonds. The two biggest drawbacks of alternatives are reduced liquidity and price discovery. There are additional potential tradeoffs, such as limited transparency, higher fees, and restrictions on redemptions. Further, some alternatives use leverage or derivatives, which can increase tail risk during certain periods.  

Therefore, it’s important to study how the investment performed during periods of market volatility, such as 2020 or 2008. With some illiquid investments, the asset may look like it’s outperforming until actual transactions start taking place at lower levels. Many skeptics contend that the diversification and volatility-mitigating effects of alternatives are overestimated due to the absence of mark-to-market pricing. 

Another consideration is that evaluating alternatives has a qualitative element. This includes studying the reputation and track record of the management team. Overall, advisors and investors should understand that many of the traditional tools and methods used to evaluate public investments are not suitable for alternatives. 

Finsum: Alternative investments continue to grow and are increasingly a core part of many investors’ portfolios. However, there are many unique challenges that come with evaluating these investments. 

Published in Alternatives
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