Managing investments can be overwhelming for advisors amidst their busy schedules, but model portfolios offer efficiency, diversification, and transparency, allowing advisors to focus more on their clients. Advisors have the option to create their own portfolios or use third-party models, with the former being more popular as it allows them to tailor investments while maintaining efficiency.
The primary benefit of model portfolios is the quick and efficient implementation of advisors' best ideas, essential for business growth. While clients benefit from the advisors' expertise, there may be instances where they desire investments outside the model, requiring advisors to balance client preferences with their investment strategies.
Overall, model portfolios streamline investment management, enabling advisors to concentrate on building strong client relationships and providing personalized financial guidance.
Finsum: Models not only meet the clients’ needs but they give more opportunities to develop a relationship with clients to better understand financial concerns.
Recent bond market volatility has caused discomfort for fixed-income investors, but it presents an opportunity for active management to potentially enhance returns.
Despite efforts by the U.S. Federal Reserve to tighten monetary policy and curb inflation, uncertainty remains as to the future direction of interest rates. This uncertainty has led to fluctuations in bond yields, creating both challenges and opportunities for investors.
By focusing on quality and liquidity, particularly in areas such as agency mortgage-backed securities, active managers can navigate these challenges effectively. As the market evolves, active management offers the flexibility to capitalize on changing conditions and uncover pockets of opportunity, potentially outperforming despite ongoing uncertainty.
Finsum: Macro uncertainty is giving active managers an upper handed in bond markets, and it could lead to additional alpha.
Emerging market bonds are offering a compelling opportunity for investors to lock in attractive yields while also having the potential for price appreciation. While there are many ways for investors to get exposure, the Vanguard Emerging Markets Government Bond ETF (VWOB) is one of the most liquid and diversified options. It currently pays a yield of 6.8% with an expense ratio of 0.20% and tracks the Bloomberg USD Emerging Markets Government RIC Capped Index.
Investing in emerging markets certainly means more risk due to lower credit quality, however the fundamentals are supportive of continued strong performance in 2024, while macro trends are favorable. JPMorgan estimates that emerging market economies will expand 3.9% this year, outpacing the 2.9% growth rate of developed market economies. It sees lower inflationary pressures due to weaker commodity prices which means that emerging market central banks should be able to cut rates, generating a tailwind for emerging market debt.
In 2023, emerging market bonds were up 11%. JPMorgan is forecasting that the category should also have double-digit returns in 2024. It believes the major risk to this outlook is inflation not falling as expected which limits the ability of central banks to cut rates, especially since the market has already priced in modest easing.
Finsum: Emerging market debt has major upside for 2024 due to attractive yields, strong fundamentals, and expectations that interest rates will be lowered.
It’s a simple truth: the more you do something, the better you’ll become at that task. For financial advisors, communicating with clients consistently and confidently is one of those skills that is essential to a healthy practice.
Let’s apply this concept to explaining to a client their investment portfolio: how it was constructed, how it’s maintained, and why it has the components it does. Imagine two scenarios: one where you’ve built customized portfolios for each of your clients and another where you’ve implemented a set of model portfolios across your book of business. In which scenario would you feel more confident explaining each approach to each client?
The point is this: model portfolios offer more than just operational efficiency. They provide advisors with the benefit of consistent communication. By implementing a defined set of investment strategies across your client base, you can polish your investment story into a clear and consistent narrative.
This consistency translates to proficiency and, ultimately, confidence. You become adept at articulating its nuances and rationale by repeatedly explaining a unified investment approach. And the more practiced you become at telling your story, the more confidence you convey to your clients.
Finsum: Find out how model portfolios can help you tell your clients a consistent and compelling investment story, building trust and confidence.
With the introduction of Bitcoin ETFs in January 2024, financial advisors are getting more questions from clients about whether it makes sense to consider these types of investments for their portfolios.
One topic that will undoubtedly get more attention in the press this year (2024) is the Bitcoin halving event, likely to occur in spring or early summer. Regardless of their view on this asset type, advisors should prepare themselves for client questions regarding this event.
Essentially, the Bitcoin protocol has pre-programmed events that periodically reduce by half the amount paid to the entities that verify Bitcoin transactions. Payments to these entities, called miners, are the only way new Bitcoins enter circulation. This means the rate at which new Bitcoins enter circulation is reduced. The point when the reward to miners is reduced by half is called a halving event.
The impact of a halving event on Bitcoin’s price is complex and debatable. Some believe that the reduced rate of new supply will cause the price of Bitcoin to rise. Others might make the case that factors beyond supply will have a more significant impact on the price in the future. Regardless, the performance of Bitcoin around the time of previous halving events is no guarantee of future price movements.
Finsum: Bitcoin is closing in on a halving event, and advisors should know the basics to answer client questions.
Fidelity Investments launched a new active fixed income ETF this week, the Fidelity Low Duration Bond Factor ETF (FLDB). The ETF will invest 80% of its assets in short duration, investment-grade debt, consisting of floating rate notes and Treasuries, with a fee of 20 basis points. It seeks to balance credit risk and interest rate risk while outperforming benchmarks.
Greg Friedman, Fidelity’s head of ETF management and strategy, noted, “It’s an asset class within fixed income that did not have any coverage until this morning. It fits a client's need to have that short duration exposure to a broad-based market of fixed income products.”
Fixed income ETFs are experiencing a boom in terms of new issues and inflows. According to Tony Kelly, the co-founder of BondBloxx, assets in fixed income ETFs will reach 40% by the end of the decade from 20% currently. Active ETFs are finding traction as they allow for specific thematic exposure without sacrificing liquidity. Last year, assets under management for active ETFs increased by 37%.
Fidelity is also jumping on the trend. In addition to launching FLDB, it debuted the Fidelity Fundamental Large Cap Value ETF (FFLV). Its new line of ‘Fundamental suite ETFs’ will be active as it will utilize a quantitative overlay to their typical process. In total, Fidelity has 66 ETFs with $55 billion in assets under management.
Finsum: Fidelity is betting big on active ETFs as it launched 2 new ones this week. Investors have been receptive to these products as it gives them narrow exposure in a liquid vehicle.
The rise in bond yields presents an opportunity for fixed income investors to find value according to Penter Bentley, the co-manager of the BNY Mellon Global Credit Fund. He notes that bond yields are close to their highest levels since the financial crisis and that conditions have been improving for investment-grade debt.
Due to these developments, he anticipates healthy returns for global and regional investment-grade credit. A key factor is borrowers have strong balance sheets with lower leverage than before the pandemic. In fact, Bentley believes that certain segments within fixed income could perform better than equities. He identifies ‘fallen angels’, short-duration high yield bonds, and emerging market corporate debt as having the most potential for outperformance this year.
Some uncertainties that could cloud this outlook including the election in November, the Fed’s ability to cut rates, and a tense geopolitical situation with Russia-Ukraine and the Middle East. Thus, investors should expect volatility to persist all year which means more opportunities for active managers to outperform.
Another place that fixed income investors can find value is with global credit. Historically, global credit has delivered better returns when markets are emerging from a downturn. In terms of global credit, Bentley sees opportunities in European credit markets and emerging market debt.
Finsum: Peter Bentley, the co-manager of the BNY Global Credit Fund, believes that investors can find value in fixed income. He sees the potential for strong returns in global credit, short-duration high yield debt, and ‘fallen angels’.
US Treasuries continue to move lower as hopes for a pivot in Fed policy are eroding. From the start of the year, the yield on the 10-year has climbed from 3.9% to above 4.3% to reach their highest levels since November. In total, it has retraced nearly half of the rally that began in October of last year.
Over this period, the number of rate cuts expected in 2024 has declined from 6 to 3 as has the timing. Primarily, this is due to the economy remaining strong as evidenced by the labor market and inflation that has proven to be more entrenched than expected. All in all, the narrative has certainly changed as some now believe the Fed may actually hike rates further especially as there are indications that the steady decline in inflation has ended.
Minutes from the last FOMC meeting also showed that committee members are concerned about the risk of inflation re-igniting if it begins to cut too soon. Overall, it remains ‘data-dependent’. However, all the recent data has undermined the case for immediate or aggressive cuts. According to Rich Familetti, CIO of US fixed income at SLC Management, the current Fed stance "is going to make it very hard for rates to fall much further from here… The pain trade is at higher rates and we will likely experience that."
Finsum: Treasuries continued their losing streak as higher interest rates have weighed on the entire fixed income complex. The market is now expecting 3 cuts in 2024 down from 6 at the start of the year.
Direct indexing offers solutions for complex financial challenges but isn't suitable for every investor. Identifying which clients may benefit involves considering factors like tax-loss harvesting, ESG preferences, factor investing, and managing large positions or capital gains.
High-net-worth clients with significant capital gains and taxable equity holdings stand to gain the most from daily tax-loss harvesting, potentially doubling their harvested losses. For clients passionate about ESG criteria, direct indexing allows for precise customization, albeit with a slight fee premium and potential tracking error. Factor investing via direct indexing suits clients with specific customization needs beyond prepackaged ETFs, although advisors must weigh the added complexity against potential benefits.
Transitioning large existing positions into diversified portfolios using direct indexing offers tax efficiency, particularly for clients with concentrated holdings or restrictions on selling.
Finsum: Advisors need to gauge their clients benefits from direct indexing strategies, and the costs and concerns aren’t always a net positive.
As financial advisors contemplate retirement or transitioning away from their practice, preparing their book of business becomes increasingly important. This preparation, sometimes called "cleaning up the book," is a strategic move to enhance the ultimate sale price of the practice and ensure the quality of care their clients will receive after they move on.
A typical client-level profitability analysis often uncovers a familiar pattern: the 80/20 Rule, where 80% of profits come from 20% of clients. However, at the lower end of the profit scale, some advisors discover that some clients are actually costing them money after they account for all expenses and lost opportunities of their time.
Such revelations are particularly significant for advisors seeking to transfer their practice to another organization. Top-tier firms, which prioritize client interests, are reluctant to acquire a practice with unprofitable accounts and certainly not at a premium.
This insight is crucial for advisors as it also allows them time to adjust the service set they provide their least profitable clients, thus improving the profitability of their practice. By doing so, advisors not only secure the well-being of their clients for the future but also justify a fair valuation for the practice they've worked hard to build.
Finsum: By starting early, advisors looking to transition out of their practice can improve their chances of a profitable succession by cleaning up their book of business.
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JPMorgan believes that when it comes to fixed income, active outperforms passive. The bank believes that the benchmark, the Bloomberg US Aggregate Index (AGG), is fundamentally flawed due to an antiquated design. It doesn’t provide sufficient diversification as it only captures just over half of the bond market. This is in contrast to equities, where passive indexes reflect a much larger share of the total market.
This is because the benchmark was created in the 1980s where fixed income was dominated by Treasuries, agency mortgage-backed securities, and investment-grade corporate bonds. Now, there are many more types of fixed income securities that are not represented in the AGG. This also means more opportunities for active fixed income managers to outperform.
Another fundamental flaw of the AGG is that borrowers with the most debt have the most weight. This means that passive fixed income investors have the most exposure to the companies with the most debt. In contrast, active managers can weigh their portfolios by factors that are more meaningful and relevant to long-term outperformance.
JPMorgan’s active funds differ from the benchmark. Instead of short-duration Treasuries, it allocates more to short-duration, high-quality asset-backed securities as these have outperformed in 12 of the last 13 years. The bank also eschews securities that the benchmark is forced to own such as low-coupon MBS. In terms of corporate bonds, JPMorgan’s active funds prioritize quality. This is in contrast to AGG as 42% of its corporate bond holdings are rated BBB.
Finsum: JPMorgan makes the case for why investors should choose active fixed income. It identifies a couple of fundamental flaws in the construction of the Bloomberg US Aggregate Bond Index.
The stronger than expected jobs report and inflation data have punctured the narrative that the Fed was going to imminently embark on a series of rate cuts. As a result, volatility has spiked in fixed income as the market has dialed back expectations for the number of hikes in 2024.
Investors can still take advantage of the attractive yields in bonds while managing volatility with the American Century Short Duration Strategic Income ETF (SDSI) and the Avantis Short-Term Fixed Income ETF (AVSF). Both offer higher yields than money markets while also being less exposed to interest rate risk which has led to steeper losses in longer-duration bonds YTD.
SDSI is an active fund with over 200 holdings and an expense ratio of 0.33%. Its current 30-day yield is 5.2%. The ETF’s primary focus is generating income by investing in short-duration debt in multiple segments such as notes, government securities, asset-backed securities, mortgage-backed securities, and corporate bonds.
AVSF is even more diversified with more than 300 holdings and has a lower expense ratio at 0.15%. It has a 4.7% 30-day yield. AVSF invests in short-duration, investment-grade debt from US and non-US issuers. The fund’s aim is to invest in bonds that offer the highest expected returns by analyzing a bond’s income and capital appreciation potential.
Finsum: Recent developments have led to a material increase in fixed income volatility. Investors can shield themselves from this volatility while still taking advantage of attractive yields with short-duration bond ETFs.
Junk-bond ETFs showed a slight uptick, suggesting potential outperformance in 2024, especially under a soft-landing scenario for the US economy, according to Michael Arone of State Street Global Advisors.
While high-yield bonds may surprise investors with their resilience, concerns persist about the Fed's tightening and its impact on economic growth. Despite recent modest gains, ETFs tracking investment-grade bonds are still in the red for the year.
Investors remain cautious about high-yield spreads and potential widening, with some preferring rate risk over credit risk. Arone suggests a diversified approach, favoring short-term debt and bonds with intermediate durations.
Finsum: Duration management could be the key to weathering the storm in 2024.
BNP Paribas Asset Management has introduced a new ESG active fixed income ETF range, starting with the BNP Paribas Easy Sustainable EUR Corporate Bond and BNP Paribas Easy Sustainable EUR Government Bond ETFs. These ETFs aim to replicate benchmark performance while integrating sustainable principles using BNPP AM's ESG methodology and exclusion policies.
The firm's Head of Index & ETF Strategies highlighted the agility of this approach in responding to controversies and adapting to changing environmental factors, aligning with sustainability label criteria. BNP made a commitment in January to improving its offerings around ESG offerings and this new suite of investments will fall in line with those goals.
Lorraine Sereyjol-Garros, Global Head of Development for ETFs & Index Funds at BNPP AM, emphasized the importance of active ESG fixed income management in navigating the challenging market landscape, offering diversification and sustainable credentials in an affordable and convenient ETF structure.
Finsum: Active bond funds could be critical to navigating the landscape of 2024 as macro volatility is looming.