Wealth Management
In RealMoney, Jim Collins, the founder and President of Excelsior Capital, discusses his DEATH model portfolio which bets against hype-fueled companies via short-selling and put options.
The portfolio has a 74% gain over the past year, even managing to hold onto impressive gains despite recent strength in equities. It has a simple construction of 10 equally weighted positions. The guiding principle behind the company is to bet against shaky companies with lofty valuations.
Some examples include Teladoc Health and SelectQuote which were among the best-performing stocks in 2020. However, this resulted in valuations that reached absurd levels. Collins believes that one factor in these stocks’ gains were inflows into Ark Investments’ family of funds as these were two of its largest holdings. Now, these stocks are falling back to Earth in terms of valuation and stock price, while Collins sees more downside.
Collins believes that these short-selling opportunities emerge when analysts and fund managers stop applying basic principles of valuation to their holdings. He cites Peloton as an example given its massive valuation that was similar to a software company despite the company being in the business of selling exercise equipment which is historically a competitive, low-margin business.
Finsum: Even with recent strength in equities, Jim Collins continues to see opportunity on the short-side. His DEATH model portfolio is constructed to bet against 10 of the most hype-fueled companies in the market.
In an article for InvestmentNews, Mark Schoeff Jr. covers the latest developments in the SEC and FINRA’s implementation of Regulation Best Interest (Reg BI). Reg BI was passed in 2019 and implemented in 2020. It requires brokers to only recommend products to customers that are in their best interests, while also informing clients of any potential conflicts of interest and financial benefits to them.
There were some questions about how Reg BI would fit in along with ‘fiduciary duty’ which is another standard that brokers must abide by. Based on recent SEC comments, it seems as if the Reg BI and fiduciary duty are working in tandem to ensure that brokers are placing their clients’ interests above their own. They also stress that although both may be triggered at different times, they are having a similar impact in terms of promoting better behavior from brokers.
In recent months, enforcement of Reg BI and the fiduciary standard have increased. In part, it’s due to greater clarity around the topic and a change in SEC leadership to Chair Gary Gensler and control of the body by Democrats. Until Gensler’s tenure, Republicans see Reg BI as the primary tool for oversight, while Democrats traditionally favor the fiduciary standard.
Finsum: One area of confusion has been the implementation of Reg BI which overlaps with the fiduciary standard for broker-dealers. Recently, the SEC has been saying that both are effective tools that are resulting in better behavior for brokers.
In an article for Quartz, Nate DiCamillo assesses whether ESG funds are having a positive impact. In theory, ESG investing will compel companies to act more responsibly by accounting for environmental, social, and governmental principles when making decisions.
Critics contend that ESG funds are merely a means for asset managers to collect fees given the murky nature of ESG factor scoring. It also creates an incentive for companies to ‘greenwash’ certain behaviors simply to get higher ESG scores.
Others are also dismissive of ESG, because it attempts to combine disparate issues into a single product that have little relation to each other. Additionally, there is little evidence that ESG results in better outcomes, yet companies spend more resources to align with these principles to please ESG-focused investors.
What’s interesting is that the trend may have peaked. In the first quarter of the year, inflows into ESG funds were down by $163 billion compared to last year. In part, it’s due to the partisan backlash against the trend as many conservatives are pushing legislation to ensure that state funds are barred from investing in ESG funds or using ESG to make investment decisions.
Finsum: ESG investing has become the center of intense controversy. Yet, it remains unclear whether it’s actually effective in terms of reaching its goals.
More...
Financial advisors looking to build an online presence must have a content strategy that is effective in terms of converting visitors into leads and then into prospects. However, these efforts have to be efficient in terms of impact given the time and energy involved.
In terms of efficiency, the best content strategy for advisors is to create evergreen content. In addition to being effective, evergreen content also has a high return of investment, because it can be reused in the future rather than most other types of content which can be only used once. In contrast, most online content has a short shelf life.
A big challenge for advisors creating online content is that it takes time, patience, and repeated postings to see any results. Ideally, this content is informative, educational, and entertaining while transmitting your authentic personality.
Some effective strategies for evergreen content are to create posts around topics like savings, planning, and investing that are educational in nature and consistent with your brand and messaging. Another option is to create evergreen content around market events that can be posted on FOMC decisions, elections, or during big swings in the market when people are naturally more interested in financial discussions.
Finsum: Creating effective online content can be time-consuming and challenging for advisors. However, one strategy is to create evergreen content around topics that can be regularly reused.
In an opinion piece for Bloomberg, former NY Fed Chair Bill Dudley shared his thoughts on why there is likely to be more weakness in Treasuries despite increasing indications that inflation is bending lower.
While longer-term yields have declined as a result, they are starting to creep higher as the economy continues to show momentum with some signs of an acceleration. Hopes that the Fed’s hiking cycle was over seem premature as Fed funds future markets now show hikes at the next two meetings.
Even if the Fed is close to the end, a robust economy means that rates will likely stay elevated at these levels for a prolonged period of time. Further, Dudley sees structurally large deficits, baby boomers spending down retirement accounts, and capital expenditures in renewables and reshoring supply chains as reasons that inflation is likely to linger above the Fed’s 2% target.
Higher inflation will also erode returns on longer-term Treasuries, leading to higher yields. This has the potential to cause stress to the financial system as we saw with the regional banking crisis especially as Treasuries make up the capital base of so many institutions. However, Dudley sees one silver lining as it could force politicians to address the country’s weakening fiscal situation.
Finsum: Former NY Fed Chair Bill Dudley doesn’t share the market’s optimism that the worst of the inflation surge is over. He sees structurally higher inflation as a headwind for Treasuries.
In a piece for Vettafi’s ETFTrends, James Comtois covers how direct indexing can improve portfolios through increased diversification while also leading to savings on capital gains taxes. The strategy achieves both objectives by helping portfolios from becoming overly concentrated.
Typically, no stock should account for more than 10% of a portfolio due to the risk of a significant decline in price or a bankruptcy filing. Portfolios can become overly concentrated due to a client receiving stock options, early investments in a company, or large holdings of vested stock.
For clients in these unique situations, the traditional investing strategy would not suffice. Instead, they need a unique solution. Simply selling these positions is not prudent as it could lead to a massive tax bill.
A better option is direct indexing which lets clients own the actual index holdings in their portfolio. Then, the portfolio can be adjusted to reduce overconcentration. Further, tax losses can be harvested on a regular basis during periods of market volatility. Subsequently, holdings of the overconcentrated position can be sold with the capital gains offset by these harvested losses.
Finsum: A unique problem for some investors is becoming overconcentrated in one position. Direct indexing offers a solution as it can help reduce the tax bill of selling these positions and lead to more diversification.