Wealth Management
Stephen H. Dover, the Chief Market Strategist of Franklin Templeton, shared his thoughts on the rise in bond yields, and whether it should be feared. Higher yields do push up borrowing costs for corporations and households.
And as long as yields stay elevated, global growth will be lower, profit expectations are squeezed, and there is greater risk to equities and credit markets. However, Dover attributes most of the increase in yields to rising term premiums rather than inflation or increased supply.
Term premiums are the additional yield that investors demand to hold onto longer-duration securities. Long-term rates are composed of 3 factors - inflation expectations, the neutral short-term interest rate path, and term premium.
Since mid-July, the yield on the 10-year has advanced by more than 100 basis points. In contrast, the yield on the 2-year note is only up about 35 basis points over the same period. Notably, inflation expectations have moderated during that time frame as well, indicating that term premiums are to explain the surge in long-term yields.
A major reason for the rise in term premiums is the removal of the ‘Fed put’ of the past decade, when central bank intervention was a constant through asset purchases and forward guidance. Overall, increased risk and volatility for long-duration bonds mean that investors need to be paid higher yields.
Finsum: JPMorgan shared its Q4 fixed income outlook. Its two base-case scenarios are a recession and a period of below-trend growth.
In a CNBC interview, CAIS CEO Matt Brown commented on the alternative asset market. He believes that a major factor behind the current growth of the category is due to increased access, highlighting venture capital, hedge funds, private real estate, and private equity.
He forecasts that alternative exposure will continue to increase among investors and advisors along with greater access. He also believes that the traditional 60/40 portfolio will shift and become a 50/30/20 mix between stocks, bonds, and alternatives. This reallocation will result in $10 trillion moving into alternatives over the next few years according to Brown.
CEO Rob Sechan of NewEdge Wealth also added that alternative investments provide diversification and a better chance of achieving targeted returns especially in an environment of falling returns for stocks and bonds.
He believes that consistent private market performance is due to greater operating and financial leverage while public securitie performance is too economically sensitive. Investors in private markets are also able to take advantage of dislocations in public markets by buying discounted assets with a long duration during selloffs. Recent examples include the European debt crisis and Silicon Valley Bank.
Finsum: Alternative investments are becoming a major asset class and increasingly a larger allocation for some investors and advisors.
As the year comes to a close, it presents an opportune moment for financial advisors to revisit strategies and offer valuable advice to clients. A timely topic is tax loss harvesting. And direct indexing is becoming a popular way for investors to accomplish this. Therefore, now is a great time to consider introducing the concept of direct indexing to your clients.
The Value of Tax Loss Harvesting
Tax loss harvesting is a technique that can reduce taxable income by selling securities that have incurred a loss. As we approach year-end, this tax-saving tactic may be appropriate for some of your clients, yet you need a convenient way to make these trades without upsetting their entire portfolio. Direct indexing allows you to accomplish this task.
Direct Indexing: No Longer Just for the Elite
Direct indexing, which involves buying individual stocks directly rather than through a fund, enhances the ability to tax loss harvest. While it's not a new concept, it's becoming more accessible to a broader range of investors. As author Medora Lee pointed out in her recent article in USA Today, "(direct indexing) was once mostly reserved for the affluent with at least $1 million to invest." But things are changing. "With better technology and zero- or low-commission trading now the norm, more people can use direct indexing."
Embracing the potential of direct indexing and tax loss harvesting is another way to demonstrate your value to your clients.
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Separately Managed Accounts (SMAs) have been part of the investment landscape for several decades. However, a recent article from InvestmentNews.com suggests it's time for financial advisors to revisit the potential these accounts offer.
Driven by technological advancements, SMAs can now be highly adaptable, allowing for the development of customized investment strategies for a wide range of investor account sizes. This enables the alignment of investment approaches with specific investor objectives, such as tax management and adherence to Environmental, Social, and Governance (ESG) principles.
Finance industry heavyweights are recognizing this potential, with companies like AssetMark, LPL Financial, and Morningstar launching or significantly enhancing their SMA platforms in the past few years. Their initiatives underscore the growing appetite for bespoke portfolio strategies that resonate with today's savvy investors.
Highlighting this trend, Aron Kershner, Managing Director at Goldman Sachs, emphasized the modern appeal of SMAs. He described them as uniquely positioned to cater to "outcome-oriented" investors, whether they have philanthropic goals, are seeking an exit from a non-performing equity manager or are managing a highly concentrated stock position.
Given advancements in technology that have increased SMA's capabilities to align with investor's needs, advisors would be well-served to take a closer look at how they can use these accounts to serve their clientele.
Often, there is a mismatch between how an advisor spends his or her time, and what drives ultimate success for the practice. By embracing technology and model portfolios, advisors can free up more time to invest in activities that build their business such as client service, marketing, and prospecting.
Surveys show that client retention and satisfaction are ultimately linked to frequent communication. However, many advisors are spending a chunk of their time managing portfolios and researching investment ideas. In fact, some research indicates that advisor-managed portfolios underperform especially in more volatile markets.
Now, there are increasingly more complicated and sophisticated investment options which increases the burden on advisors and further compromises client services. With model portfolios, advisors can outsource large parts of the process such as research, portfolio management, and onboarding while providing more options and better performance.
By outsourcing this function, advisors can also reduce costs and create greater efficiencies. Model portfolios can also help in other areas such as tax management which is another priority for clients. By centralizing information, it can identify opportunities across portfolios and lead to a more personalized experience.
Ultimately, model portfolios are a way for advisors to leverage technology to drive better outcomes for their clients and business while creating a more efficient practice.
Finsum: Model portfolios offer many benefits to advisors. The primary one is it frees up more time for client service.
Yields on long-term Treasuries have broken out to 16 year highs. This has unleashed considerable volatility for bonds amid uncertainty about the economy’s trajectory and the Fed’s next move.
At the same time, many investors are looking to take advantage of this weakness and increase their exposure to the asset class especially with yields at such attractive levels. However, the current environment may be more suitable for active fixed income ETFs like the T. Rowe Price QM US Bond ETF (TAGG) rather than the typical passive options.
Active managers have more freedom and flexibility when it comes to credit quality and duration, meaning they are able to take advantage of market inefficiencies. And, there are likely more inefficiencies in the current environment due to the cloudy economic and monetary outlook.
As an example, TAGG invests in investment-grade fixed income securities, including corporate and government debt and mortgage and asset-backed securities across all sorts of maturities. Additionally, TAGG still retains many of the benefits of passive strategies such as low costs and diversification.
Finsum: The current environment is unusually uncertain and volatile for fixed income investors. Here is why active strategies are a better fit for the current environment.