Wealth Management
In its midyear outlook for the fixed income market, UBS struck a bullish tone on mortgage-backed securities (MBS) but sees most of the fixed income market staying within the range from the first half of the year.
It believes the Fed will keep hiking rates until a terminal rate of 6% given the resilience of the economy. It ascribes the recent weakness in fixed income as a result of the market calibrating to this new reality rather than a recession in the second-half of the year.
Therefore, the market consensus that 2023 would be the year of fixed income has proven to be incorrect. Until the Fed begins cutting rates, fixed income markets face a significant headwind especially shorter-duration notes. Still, UBS remains cautious that as savings get depleted, higher rates could start to eat into consumer spending and other forms of economic activity.
Given this challenging environment, UBS recommends MBS given the underlying strength of the housing market which has remained stable due to low supply and demand driven by demographics despite substantially higher mortgage rates.
Finsum: UBS shared its midyear outlook for the fixed income market. It shared its economic outlook and why it’s bullish on MBS.
For Bloomberg, Nir Kaissar shares his thoughts on why Blackrock’s model portfolio business is lagging in terms of adoption, and why he believes this will continue. The purpose of model portfolios is to simplify the investing landscape for investors and advisors given the abundance of funds to build a portfolio.
Now, Kaissar believes that there are too many model portfolios which is creating additional unnecessary complications for advisors. Some advisors will stick to model portfolios from a major asset manager like Blackrock or Vanguard given a strong brand name and lower costs.
Currently, model portfolios account for about $4.2 trillion in assets, and this is expected to double over the next 5 years. While Kaissar sees this as a positive for investors due to lower costs and more transparency, he doesn’t share the industry’s optimism about the growth trajectory of model portfolios since many advisors don’t have a financial interest in recommending the product for clients.
In fact, many advisors would be giving up revenue if they moved all their clients into model portfolios. This is also reflected in mutual funds having an average annual expense ratio of 1.3% per year,, while model portfolios’ average expense ratios tend to be between 0.15% and 0.3% per year. Given the incentives, Kaissar believes that growth in model portfolios will fall short of expectations.
Finsum: Model portfolios are a booming part of the wealth management industry. Yet for many advisors, the incentives don’t support full adoption.
In a piece for ETFTrends, James Comtois covers how Vanguard successfully helped its clients reduce their capital gains tax bill. This was especially salient in 2021 when many early-stage investors in companies that went public reaped massive profits as they cashed out during the IPO process.
Some advisors placed the capital gains of these clients into direct indexing. With direct indexing, investors own the actual holdings of the index rather than a fund. This means that tax losses can be regularly harvested and accumulated to offset capital gains and reduce a clients’ tax bill. Such a strategy is not possible with investing in traditional funds.
Further, investors can continue to track their benchmark as the positions that are sold can be replaced by different positions that have similar factor scores. Research shows that harvesting tax losses can boost portfolio performance but more benefits accrue with more consistent scanning.
These capital gains can be deferred for a couple of years into the future. Similarly, tax losses that are harvested can also be deferred for when the tax liability emerges. Overall, these strategies can provide considerable benefits to a select group of investors,
Finsum: Direct indexing provides significant benefits to investors that have a large tax bill now or in the future.
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Blackrock’s Q2 earnings report gave some insights on the performance of its various funds in addition to commentary from its management team. Overall, the asset manager exceeded analysts’ consensus expectations with $9.28 in earnings per share vs $8.45. Compared to last year’s Q2, net income was up 25% while revenue was down 1%. Total assets under management climbed to $9.4 trillion.
However, the company did miss analysts’ estimates when it came to inflows into its equity and fixed income funds at $57 billion vs expectations of $81 billion. Active funds were particularly weak with $9.7 billion of outflows from active equity and $3.7 billion from active fixed income.
These disappointments have weighed on Blackrock’s stock price which has underperformed the S&P 500 YTD. Yet, the company remains confident that future growth will come from active fixed income. According to Blackrock President Rob Kaptio, “There is finally income to be earned in the fixed-income market.” He sees higher yields as a “once-in-a-generation opportunity” and that are supportive of inflows into its lineup of active fixed income products.
Finsum: In Q2, Blackrock saw negative inflows into active fixed income and equity funds. Yet, the company continues to see these products as key to its long-term growth.
In an article for TheStreet, David Dierking discusses two ETFs offering investors weekly dividends. It’s an innovative offering by SoFi as most equities pay out dividends on a quarterly basis, while fixed income ETFs offer monthly payouts.
In contrast, the SoFi Weekly Dividend ETF (WKLY) and the SoFi Weekly Income ETF (TGIF) are structured to give investors a weekly payout. WKLY is made up of a blend of equities and fixed income. It invests primarily in dividend-paying companies with a market cap of over $1 billion. Some of its largest holdings include Exxon Mobil, Johnson & Johnson, and JPMorgan Chase. It pays out $0.02 per share on a weekly basis which is a 2.2% annual yield.
TGIF invests primarily in high-yield fixed income and is considered a bond ETF. It mostly invests in short and intermediate-term duration and also has an active management structure which gives it wider latitude to take advantage of opportunities in the credit space. It pays out $0.07 per share on a weekly basis and has an annualized yield of 3.8%. Since inception, it had one dividend hike from $0.05 per share to $0.07.
FinSum: SOFI has introduced an equity fund and fixed income fund which offers weekly dividends. Here are some important considerations.
In an article for InvestmentNews, Steve Randall shares some insights from a recent study conducted by Dynasty Financial Partners of investors who work with an advisor and have at least $500,000 in investable assets.
It finds that many wealthy investors seek out an advisor following a major life event such as a change in employment or inheritance. Interestingly, 57% end up working with the first advisor they meet. This is an indication that advisors should invest in efforts that increase their visibility especially among this set.
One caveat is that while high net-worth clients are quick to choose an advisor, they are also prone to switching especially if they feel a lack of trust or generating value. For high net-worth clients under 45, 61% had changed advisors.
Another finding from the research is that referrals remain an important source of new clients. About a little more than half of new clients come from family and friends with another quarter coming from a professional colleague. About a quarter of new business came from social media, blogs, or other online platforms.
Finsum: A recent survey of high net-worth investors by Dynasty Financial Partners has some interesting insights for financial advisors.