Wealth Management
In the Financial Times, David Thorpe covered comments from John Roe, the head of multi-asset investing at Legal and General Investment Management, about why investors need to move past the 60/40 portfolio. Until recently, the 60/40 model portfolio was considered the gold standard based on the notion that stocks and bonds are inversely correlated.
According to Roe, this concept doesn’t work in higher-rate and higher inflation environments like the 70s. He added that "The idea is that if a real recession happens, then equities fall in value but bonds rise in value because the expectation is that inflation would be falling. But the reality is that in the 70s and the 80s, when we had a recession but inflation was also quite high, that inverse correlation didn’t always happen.”
He advises investors to also have a healthy allocation to more asset classes including real estate, alternatives, and emerging markets. These investments would outperform if inflation proves to be entrenched. As 2022 demonstrated, both stocks and bonds are liable to underperform when inflation surprises to the upside.
Finsum: The 60/40 portfolio has been considered the gold standard for investors. However, this is being reconsidered especially as it has shown to underperform in periods of higher inflation.
For VettaFi’s ETFTrends Channel, Nick Peters-Golden discusses why active fixed income is the best way for investors to take advantage of higher yields. Investors should be discriminating when it comes to selecting fixed income instruments due to challenges like the inverted yield curve and the lack of real yields in many areas.
The overall climate is becoming more favorable to fixed income with the Fed finished or in the final innings of its hiking cycle, while inflation continues to moderate. However, investors should favor certain categories.
The best opportunities from a risk and reward perspective are in corporate credit and global, high-yield. Active fixed income funds offer investors the opportunity to increase exposure to these parts of the market, while avoiding less attractive parts.
According to Peters-Golden, active fixed income allows a bottom-up approach to investing which will outperform index-based funds. And, this judiciousness is more necessary in the current environment given the wide dispersion in quality and yields.
For instance, active corporate credit funds are able to outperform, because they are allocating to firms with strong balance sheets, while corporate credit index funds are taking a one size fits all approach.
Finsum: Trends are improving for bonds, but investors need to remain selective given the unique nature of the cycle. Active fixed income allows increased allocation to areas with better fundamentals and avoids ones where the risk-reward is not attractive.
In a recent Bloomberg article, Katherine Greenfield covered strength in high-yield fixed income ETFs on the back of the equity rally and growing optimism that the US will evade a recession, while inflation gradually decelerates. Initially, strength in equities was confined to the tech sector but has now broadened out to the rest of the market.
Another indication that the odds of a soft landing continue to move higher is that there was more than $2 billion of inflows, last week, into the iShares iBoxx High Yield Corporate Bond ETF which has $17 billion in assets. This was the largest inflow into any fixed income ETF over that period and the most since November 2020.
Strength in high-yield fixed income is counterintuitive due to several downgrades and stresses in areas like regional banks and commercial real estate. However, investors seem to be looking past these issues and focusing on improvements on the economic and inflation front.
Overall, high-yield fixed income is up about 4% YTD, following a 11% drop in 2022. Investors also seem eager to lock in high rates as futures markets indicate that the Fed is going to pause it's hiking campaign, while many expect it to start cutting rates by the end of the year.
Finsum: High-yield fixed income ETFs are seeing major inflows despite an assortment of risks. Many investors believe these risks are priced in, while recent news on the economy and inflation have been bullish for the asset class.
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For Vettafi’s Modern Alpha Channel, Scott Welch and Andrew Okrongly discussed how the WisdomTree Endowment Model Portfolios are faring given the volatile nature of markets over the past year.
Endowment models have recently been introduced to individual investors, and they typically offer broad and global diversification, more use of active strategies as opposed to passive ones, non-traditional and low correlation assets, longer term view, and a disciplined and repeatable process through multiple market cycles. The ultimate result is a portfolio that is very diversified and should deliver positive returns in all sorts of market conditions..
Of course, stocks and bonds continue to make up the bulk of the holdings. And, endowment portfolios typically use leverage to free up funds for investing in real assets and alternative investments for diversification and non-correlation.
Examples of real assets include precious metals, energy commodities, and real estate. These tend to perform well in inflationary environments while adding to diversification. Alternative investments include long/short strategies, global macro, managed futures, options, short-selling, and event-driven trades. These also lead to more diversification than a standard portfolio.
Over the last couple of decades, endowment model portfolios have accomplished its goal of blunting volatility while delivering consistent, steady returns. The one drawback is that these portfolios perform poorly during equity bull markets but tend to catch up during the ensuing bear markets.
Finsum: Endowment model portfolios are a relatively new offering to individual investors. These portfolios mimic the style of endowments by investing in stocks, bonds, real assets, and alternative investments with the goal of smoother returns and more diversification.
In an article for InvestmentNews, Bruce Kelley covers how Goldman Sachs and Citigroup are looking to bolster their wealth management divisions. In this sense, these banking giants are behind their peers like Morgan Stanley and UBS who have been quite aggressive in recruiting financial advisors.
Currently, these efforts consist of recruiting experienced advisors, training younger advisors, and acquisitions of thriving practices. One challenge for Citi and Goldman Sachs is that recruitment of advisors is quite competitive, leading to higher prices and more generous terms. Additionally, technology has also given more tools and capabilities to advisors, shrinking the gap between megabanks and smaller practice.
Despite this, Wall Street banks continue to see wealth management as an area of growth. On a recent earnings call, Citigroup CEO Jane Fraser said, ““We see a lot of potential for growth in Asia as we fill in the coverage across the full wealth spectrum there. We will be scaling up in the U.S. by building out the investment offering and cross-selling into our existing and new clients across the country.”
Similarly, Goldman sees its future growth opportunities coming from hiring more advisors. It’s looking to add to its stable of 1,000 financial advisors for wealthy clients in the US and internationally.
Finsum: Advisor recruiting has been heating up over the past decade. Goldman Sachs and Citigroup have fallen behind their peers but are looking to increase their efforts in the coming quarters.
In a piece for ProfessionalPlanner, Michael Collins lays out some pros and cons of investing in alternatives. Overall, he takes a positive view of the asset class as it can boost returns and diversification. Additionally, it can allow investors to take advantage of short-term market inefficiencies which is more difficult through conventional investing and the most popular assets like stocks, bonds, or real estate.
Alternative investments are seeing strong growth over the last decade due to regulatory changes, and technology leading to increased access for private markets. In 2022, the asset class performed particularly well especially relative to stocks and bonds which were both down double-digits.
One challenge is that alternative investments come in many different forms. Some examples include short-selling, a long-short portfolio, global macro, event-driven, arbitrage, private equity, venture capital, and private market investing.
There are some drawbacks to consider. For one, there is less liquidity and transparency especially relative to more popular asset classes. Additionally, many alternative strategies do employ leverage which can be a double-edged sword during periods of economic or monetary stress. Another challenge is that alternative investments typically have higher fees than traditional investments which can erode returns over long periods of time.
Finsum: Alternative investments are seeing a surge in interest due to their strong performance in 2022 and wariness about the economy and traditional asset classes.