Wealth Management
In an article for Bloomberg, Marvin G. Perez covered Florida Governor Ron DeSantis’ latest move in his war against ESG. Lately, the movement for institutional investors to consider environmental, sustainability, and governance criteria in their investments has drawn criticism from conservatives.
Florida is increasingly the frontline for these political battles, so it wasn’t surprising to see the Republican-controlled State Senate approve a bill to abn state and local governments from using ESG criteria in making their decisions. Last month, the legislation passed the State House of Representatives and is expected to be signed into law by DeSantis soon.
DeSantis is looking to consolidate support as he is widely expected to enter the 2024 presidential race. He and others have criticized ESG investing as an overreach and symptomatic of ‘woke capitalism’. So far, Florida has pulled $2 billion from Blackrock funds which many consider to be the vanguard of the ESG movement.
The legislation also bars municipalities from selling bonds that are connected to ESG projects or ratings. Last year, Florida sold about $13 billion in bonds, making it the fourth-largest issuer in the country.
Finsum: Florida is increasing its efforts to combat ESG with the State Senate approving a bill that bars state and local governments from using ESG criteria in investments and selling bonds.
After a few quarters of turbulence, economic conditions are improving for fixed income according to an article by Principal Financial Group. Essentially, the Fed is succeeding in realizing its mandate as inflation and economic growth are moderating.
This means that the Fed’s hiking cycle is most likely in its final innings. Already, we are seeing longer-term rates bending lower in anticipation which is providing support to the asset class. Although there is the potential for more short-term volatility, the softening of economic and inflation data means that the longer-term trend is higher.
The first quarter of 2023 featured mild softness in inflation and the labor market, while economic growth came in better than expected. In the second quarter, economic data is likely to soften which increases the odds of the Fed pausing.
Additionally, the Fed’s rapid tightening over the past year has not been felt in the economy. As these effects become more evident, fixed income will outperform and reward investors willing to sit through near-term volatility.
Finsum: Fixed income performed well in the first quarter, but economic conditions continue to develop in favor of the asset class.
In an article for InvestmentNews, Palav Ghosh discussed the growth in capital allocated to alternative investments by global asset managers. There was a 10% increase from 2021’s $130 billion to $144 billion in 2022 according to a report from Vidrio Financial.
Some of the largest destinations for this capital were private equity and venture capital which accounted for $61.6 billion. This was a slight drop off from $64 billion in 2021 albeit not surprising given the struggles of these two asset classes. However, inflows into credit and real estate remained the same at $27 billion.
Interestingly, there was a more than 100% increase of inflows into hedge funds which went from $8 billion in 2021 to $16.6 billion in 2022. Inflows into infrastructure and real assets also slightly increased to $7.3 billion and $4.9 billion, respectively.
Some of the top allocators to alternative investments were the New York State Common Retirement Fund, the State of Wisconsin Investment Board, and the California State Teachers Retirement System.
Overall, allocators are moving away from the typical 60/40 model and closer to a balanced mix of private and public investments.
Finsum: Allocators are increasing exposure to alternative investments. This isn’t surprising given the volatility for stocks and bonds over the past year.
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In an article for SmartAsset, Rebecca Lake, CEPF, discussed some networking strategies that advisors should implement to grow their business. First, networking will ensure that advisors have a pipeline of future opportunities.
Networking is also effective to help you establish a reputation in your community and can help you connect with people who could be potential clients. It’s especially important as word of mouth remains the primary way that people choose their advisors.
The simplest step is to join a professional association that is national or locally based. These will regularly put you in face-to-face contact with people in your industry and potential clients in an informal, relaxed setting. Local organizations will also give you the opportunity to participate in community events which can provide organic opportunities to form relationships with people in your community.
Another important piece for advisors is to grow a presence on social media. It can help display your personality and thinking on a deeper level, and it can help you find potential clients within your niche. And, you can also use social media to try to understand whether or not these prospective clients are a good fit for your practice based on their digital footprint.
Finsum: Networking is an integral part of success for any financial advisor as it will ensure that you have a pipeline of potential clients.
Model portfolios continue to be a major beneficiary of current volatility and uncertainty as evidenced by Charles Schwab seeing $4.6 billion in inflows to its bond ETF according to an article by Bloomberg’s Carly Wanna.
These inflows are being attributed to adjustments made by a model portfolio and are offered by many large asset managers. Currently, there is no firm estimate on the size of the model portfolio industry, but manu speculate that trillions are managed through them. And, they are offered by the largest asset managers including Vanguard and Blackrock.
But, the best indication of their size and influence is the massive inflows and outflows from ETFs which tends to happen at the beginning or end of quarters. Additionally, it’s easy to match the inflows and outflows from various ETFs. In this case, the model portfolio seems to be reaching for increased yield as it moves out of Treasuries and into lower-rated corporate debt.
Overall, model portfolios are booming due to the strategy providing the benefits of active management with lower costs and increased transparency.
Finsum: Model portfolios are having an impact on Wall Street as evidenced by the huge inflows into Schwab’s bond ETF.
In an article for InvestmentNews, Jenny Zhang of Beyond Investments laid out a quick guide for advisors to evaluate alternative investments. It’s not surprising that interest in the asset class has soared in recent months given the various macro headwinds and poor performance for stocks and bonds in 2022.
Another factor leading to increased interest in alternative investments is that credit is tightening up amid a slowing economy, high-profile bank failures, and a hawkish Fed. This will force many companies to seek capital in private markets, leading to more opportunities for investors in this niche.
From an advisor perspective, it’s quite challenging especially as there is more risk and less transparency around alternative investments. The key is to understand that the asset class can be part of a diversified portfolio.
In terms of fundamentals, advisors should first focus on a client’s specific needs and risk tolerance. Then, they should understand the size of the total market and the borrower’s collateral in the vent of a default. Additionally, two more important factors are the capital structure of the deal and its time horizon.
Finsum: Alternative investments are rapidly growing due to the uncertainty of today’s environment. Here is a quick guide on how to evaluate these investments.