Wealth Management
Markets often behave unexpectedly. This is certainly the case in 2023 as many have been caught off guard with strong equity markets which have sent stocks to their highest levels since the middle of last year. The S&P 500 is now nearly 20% above its October low which many would deem a new bull market.
In an article for TheStreet, Jim Collins, the founder of PortfolioGuru, discusses a model portfolio that would do very well if this unexpected return to normalcy continues. His strategy involves buying preferred shares of regional banks which have been among the hardest-hit parts of the market. The preferred shares do offer generous yield but have major upside in the event that interest rates move lower, easing the inverted yield curve which is proving to be a major challenge for the sector.
Collins says that this model portfolio is essentially a bet that the US’ financial system will remain stable and continue functioning well, meaning that we have passed the worst part of the crisis. He believes that the portfolio has considerable potential for capital gains in addition to hefty dividend payments.
Finsum: Jim Collins shares a model portfolio that would particularly benefit if the crisis for regional banks is over and a return to normalcy is imminent for financial markets.
In an article for ETFTrends, James Comtois discusses how investors can capitalize from volatile markets with direct indexing. In recent days, volatility has plunged following the successful resolution of the debt ceiling which avoided a potentially catastrophic default. However, investors should continue to be wary given rising recession risk, geopolitical tensions, and still uncomfortably high inflation.
While volatility is painful for all investors, direct indexing is one way that investors can profit from it unlike with index funds. With direct indexing, an investor owns the actual stocks in the index. Due to this, losing positions in the account can be sold which can be used to offset gains from winning positions to reduce tax liabilities. Subsequently, these losing positions are replaced with similar ones to maintain diversification and faith with the underlying index.
Notably, this strategy works even in years when the index was up. And, it works even better in conditions like 2023 when we have indexes with healthy gains albeit with considerable volatility. Further, many services now will automatically scan portfolios to identify rebalancing opportunities. And, the more frequent the scans, the more alpha that can be uncovered.
Finsum: While market volatility has died down in recent days, it’s inevitably going to come back. Find out how direct indexing allows investors to capitalize during volatile markets.
ESG is increasingly becoming another front in the political battle between Democrats and Republicans. Over the last decade, ESG has been embraced by many asset managers and has been used to encourage corporations to evaluate decisions beyond just finances and consider environmental, social justice, and governance implications. This has led to a pushback among conservatives who are opposed to corporate activism and want a return to when investors and companies focused on financials.
It culminated with legislation passing in many red states that bars asset managers from considering ESG factors when making investment decisions with state funds. The same battle has raged at the federal level. In a Reuters article, Daniel Wiessner covers the Biden Administration’s filing to toss a lawsuit from a consortium of 25 Republican-led states which is looking to uphold the Trump Administration's ban on socially conscious investing by employee retirement plans.
The ruling would impact retirement plans of nearly 150 million Americans, representing $12 trillion in assets. According to the Department of Justice and the Biden Administration, retirement plans should consider ESG factors in addition to financial information due to their impact on a company’s long-term health.
Finsum: Republicans are looking to fight back against ESG investing. In turn, the Biden Administration is looking to toss a lawsuit from Republican states which would ban ESG investing for employee retirement plans.
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In an article for the Institute for Management Development, Maude Lavanchy discusses the opportunities and risks of venture capital (VC). It’s not surprising that interest in alternative investments has increased following 2022 when both stocks and bonds posted negative, double-digit returns.
As a result, institutions and asset managers are increasing the amount that they allocate to alternatives and specifically, venture capital. Typically, venture funds focus on early-stage, high-growth companies. This obviously comes with considerable risk but also the potential to generate significant returns. These funds do tend to have higher costs and fees with much less liquidity
Historically, VC has outperformed stocks and bonds. Between 1987 and 2022, VC had an average return of 59% compared to 15.9% for the S&P 500 and 6.8% for Treasuries. Two caveats are that venture returns tend to be quite volatile, and returns will be lower as more capital enters the ecosystem, leading to higher valuations and more generous terms for startups.
So, VC is most appropriate for investors that have a long time horizon and are OK with the lack of liquidity in exchange for the increased diversification and returns.
Finsum: VC is seeing renewed interest in 2023 due to its outperformance relative to stocks and bonds in addition to diversification benefits.
Financial markets are breathing a sigh of relief following an agreement between Democrats and Republicans to raise the debt ceiling and avoid a default. Not surprisingly, equity markets are reaching their highest level since last summer, and stocks are now up more than 20% from last October’s lows.
However, one consequence is that a major wave of Treasuries is expected to hit the market in the coming weeks as the US Treasury looks to replenish its holdings since the Treasury reached its limit on borrowing in January.
According to Wall Street, there is expected to be issuance of $400 billion in June and $500 billion between July and September with a cumulative total of $1.3 trillion by the end of the year. Some are warning that this could lead yields to modestly push higher and reduce overall market liquidity for equities and fixed income.
Others are more sanguine and believe that this new supply will be absorbed by money market funds who are looking to move money out of repo facilities and into longer duration Treasuries.
Another variable that could impact Treasury demand is whether the Fed will continue hiking rates or has the hiking cycle truly ended. The latter scenario would be more beneficial for fixed income, while the former would crimp demand.
Finsum: Financial markets are recovering strongly from the debt ceiling agreement, but an onslaught of Treasury supply could have a major impact on fixed income markets.
In an article for GoBankingRates, financial advisors shared some of their top tips for onboarding new clients. While every client has unique circumstances and their own goals and definition of success, there are still some universal rules that apply for effective financial planning.
One of the first tips is to understand a clients’ cash flow with a full accounting and understanding of each dollar that goes in and out. This is the first step in any sort of effective financial planning. Only once this is complete does it make sense to move onto other components of planning like investments or an estate plan. Cash flow analysis tends to be tedious for advisors and clients, but it creates a solid foundation and is necessary for success.
Another tip is to gain clarity around financial goals in the short and long-term. This creates a roadmap and rules that will lead to better decision and behavior. For most clients, their success comes down to more effectively managing their finances and increasing allocations to savings and investing.
Finally, plans should be written down and frequently read and revised. Having a written plan leads to increased compliance especially in terms of sticking to a budget and an investment plan regardless of market conditions.
Finsum: Onboarding clients is a delicate mix of universal processes and customized service. Here are some tips from advisors on more effective onboarding.