Wealth Management
Tony Davidow, the Senior Alternatives Strategist at Franklin Templeton, recently penned a piece for the firm’s Beyond Bulls and Bear blog about how alternative investments are seeing renewed interest, and how they can help portfolios reduce volatility and increase income and growth prospects.
2022 was the first year in the past century that stocks and bonds were both down double-digits. And, the last time that both asset classes had negative returns was in 1931 and 1969. Of course, 2022 was a unique year as the global economy battled with rising rates, spiraling inflation, growing recession risk, and a myriad of geopolitical threats.
It was quite painful for most investors and advisors whose portfolios are in stocks and bonds. But, it’s led to a surge in interest for alternative investments. Many outperformed in 2022 and led to reductions in portfolio volatility while helping boost portfolio income and serving as a more effective inflation hedge.
Until recently, many alternatives were only available to large institutions. However, access to these investments has been democratized due to technology and regulatory changes. Therefore, advisors should be open to these investments especially if economic and market conditions continue to be challenging.
Finsum: Following the events of 2022, advisors and investors should consider including alternative investments in their portfolio given their ability to reduce volatility and boost income.
In an article for Bloomberg, Anchalee Worrachate covered a recent note from Goldman Sachs’ Della Vigna who was critical of the ESG movement and said that it is leading to underinvestment in energy production. In turn, this would lead to higher prices down the road and hurt the energy security of developed countries as was briefly experienced in the months following Russia’s invasion of Ukraine.
He believes ESG has focused too much on divesting from fossil fuels rather than investing in renewable energy. Over the last 10 years, capital expenditures on energy production have fallen short of what’s necessary. Vigna notes that spending on renewables is rising, but it’s not close to enough to make up the gap.
Another criticism of ESG is the focus on absolute emissions rather than the carbon footprint of emissions. Vigna says this is misguided, because it simply means less energy production rather than boosting zero emission energy production.
Vigna is worried that the US and Europe have lost the urgency that they felt in the spring of 2021 to expedite the energy transition process given its numerous secondary effects. He warns that the equilibrium remains very tight, and there is the risk of another surge in prices. Despite this threat, the momentum to transition has slowed, and ESG proponents have gone back to a focus on emissions rather than new sources of energy.
Finsum: Goldman Sachs’ Della Vigna believes that the energy transition to renewable sources needs to be expedited, in part, due to ESG’s focus on reducing emissions.
In an article for ETFStream, Theo Andrew discussed how bond market liquidity has improved in recent years due to increased electronic trading and fixed income ETFs. Bond ETFs have gone from $729 billion in assets under management to $1.7 trillion between 2017 and 2023. By the end of the decade, it’s projected to reach $5 trillion which would equate to 5% of the global bond market.
In some smaller markets, ETFs are accounting for an increasing share of trading volume. Institutions are increasingly getting comfortable with these instruments especially to manage credit risk. Trading in ETFs is also less costly than individual bonds.
Due to increasing liquidity, there is increased price transparency and tighter spreads. It also is enabling more portfolio trading, where asset managers can automate rebalancing and quickly implement changes in the portfolio.
Growth in portfolio trading and fixed income ETFs has been symbiotic as a deeper and richer fixed income ETF market makes portfolio trading more appealing. In turn, more allocations to portfolio trading inevitably boost inflows into fixed income ETFs.
Finsum: Fixed income ETFs are leading to an increase in bond market liquidity. In turn, this is leading to more adoption of portfolio trading.
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In an article for Kiplinger’s, Jerry Golden discussed how running out of money is an investor and retiree’s worst nightmare, and how annuities can help address these fears. Retirees do face challenges such as uncomfortably high inflation, soaring healthcare costs, and concerns about the viability of social payments.
Therefore, investors need to have a solid plan to ensure that there remains steady and sufficient income on top of Social Security and other potential pension payments. The goal should be to have a growing and guaranteed income that continues throughout all types of economic circumstances.
One suggestion for retirees with these fears is to use a more conservative withdrawal rule rather than the standard 4%. This will give an increased margin of safety and boost your portfolio’s resilience.
This is difficult and not practical often in reality. A better approach is to integrate financial products in the portfolio which reduce risk and dampen portfolio volatility such as income annuities.
Having an income reduces the odds of money ‘running out’ by a significant degree while also allowing retirees to let their portfolios continue to work and grow. Often, fear is an impediment for retirees from achieving their financial goals, because they are unwilling to stick to the plan through difficult conditions.
Finsum: Running out of money is every retiree’s worst fear. Annuities are one way that retirees and advisors can address these fears.
In an article for Vettafi, Todd Rosenblum covers the growth of active equity and fixed income funds, and how they are taking an increasing share of the ETF market.
The category has seen 50% growth in assets over the last 3 years and now comprises 6% of the total ETF market. In response to this demand, there has been an increase in the issuance of active ETFs.
It’s particularly relevant for fixed income as active funds can take advantage of opportunities unavailable to passive funds. One example is the Blackrock Flexible Income ETF which is designed to give investors opportunities for yield in more obscure markets.
Blackrock is a major presence in the active ETF market and also recently launched the BlackRock Ultra Short-Term Bond ETF and the BlackRock Short Maturity Bond ETF. Overall, Blackrock is looking to create a comprehensive ‘active ETF platform that complements its existing lineup of passive ETFs and active mutual funds. It gives advisors and investors access to its investment resources and management while retaining the benefits of an ETF.
Finsum: Active ETFs are booming, and Blackrock is looking to capitalize with several recent offerings in the space.
A new breed of end to end third party operating models could provide handsome cost savings, spawn new and innovative business models and stoke up new streams of revenues, according to bcg.com. That outlook’s based on a new report, titled Scalable Tech and Operations in Wealth and Asset Management, by Boston Consulting Group and FNZ, a global end to end wealth platform.
“Wealth and asset managers are faced with a myriad of challenges, and it’s clear that partnering with end-to-end third-party operating models can yield benefits and create competitive advantage if done right, despite running counter to certain long-established practices,” said Akin Soysal, a BCG managing director and partner and coauthor of the report.
"Customer demands for personalized wealth solutions are steadily rising along the value chain, requiring wealth and asset managers to make further investments," noted Din Mustaffa, group chief strategy officer at FNZ, according to finance.yahoo.com. "It's important to note that while most of these changes will require technology as an enabler, operating models will also need to be adjusted to navigate the shifting landscape in a cost-effective manner."