In an analyst note, JPMorgan’s Chief Equity Strategist Marko Kolovanic discussed the anomaly between an increasingly shaky market and economic outlook, in contrast to the S&P 500 volatility index (VIX) which continues to trend lower. 

A week ago, the VIX dropped to 16 which is its lowest level since November 2021, despite the S&P 500 being 16% lower compared to 17 months ago. Yet, economic growth continues to decelerate, inflation is meaningfully higher, and the Fed remains in a hawkish posture. 

Kolovanic notes that we are not likely to see any abatement of these pressures in the coming months given the tightening of financial conditions and rising recession risk, while the Fed’s priority remains stamping out inflation even at the expense of the economy and labor market. Further, he notes stress in the banking system and drumbeat of rising tensions regarding China, Russia, and an upcoming election cycle.

He says depressed volatility is due to technical reasons, primarily the selling of short-term options which leads to dealer buying of stocks and volatility leaking lower. Adding to this is continued resilience in Q1 earnings while many were anticipating a meaningful decline. 

Finsum: Volatility is at 17 month lows despite stocks being much lower. JPMorgan’s Marko Kolovanic explains some reasons behind this discrepancy. 

Josh Schwaber discussed how model portfolios can help improve the client experience in a recent article for InvestmentNews. 

The biggest benefit is that it allows advisors more time to spend with clients to understand their needs and goals rather than portfolio management. After all, an advisors’ long-term success is dependent on retaining and attracting clients.

However, many clients fail at this critical step and don’t establish trust with their clients. Further, they aren’t successful at giving advice that applies to financial health from a holistic perspective and instead focus on investment recommendations. 

Model portfolios are a great solution to this dilemma as it allows advisors to spend more time on clients and their needs. They also allow advisors to grow their practices to a bigger size due to standardization and the consistent analytics offered by model portfolios. 

Further, model portfolios lead to less time spent on managing portfolios, yet there is no tradeoff in terms of returns. They allow advisors to leverage institutional resources, while still allowing for customization to account for a client’s specific goals. 

Overall, model portfolios allow clients to grow their practices to an even larger size with no tradeoff in terms of client service. 

Finsum: Model portfolios are an invaluable tool to help advisors grow their practice, while still maximizing time spent on understanding and serving clients. 

In an article for Financial Planning, Victoria Zhuang discussed the brisk pace of recruitment for financial advisors in the second-half of 2022 despite a volatile and challenging market environment. 

According to Diamond Consultants, there was a 12% increase in the number of experienced brokers who switched firms. This is a contrast to the typical pattern of advisor movement and recruitment slowing down in volatile conditions. 

In the first half of 2022, 4,249 experienced brokers switched firms which increased to 4,757 advisors moving in the second-half of the year. In total, more than 9,000 experienced advisors moved which was slightly more than 3% of overall advisors in the US. 

In addition, transition deals were much more generous in the past, indicating that the wealth management industry remains competitive and ambitious in terms of recruitment and growth. This is also reflected in the generous deals offered to entice movement with many signing deals paying more than 300% of 12-month revenue. Another noticeable trend is gains made by independent broker dealers, while the big banks continue to see outflows of experienced brokers to these smaller firms. 

Finsum: 2022 was a banner year for the recruitment of experienced advisors. This is in contrast to the typical pattern of muted recruitment during shaky markets.

In an article for the Globe and Mail, Tom Czitron shared some thoughts on why investing in alternative asset classes could get more challenging over the next decade. He defines alternatives as any asset that is not an equity, bond, or a money market fund.

The most well-known examples are hedge funds, private equity, natural resources, real estate, and infrastructure. Typically, there is low correlation with stocks and bonds which increases diversification and long-term returns. 

Yet, there are some challenges as returns can widely differ. Additionally, there is less coverage and data regarding the alternative investments unlike stocks and bonds where there is Wall Street coverage, regulatory disclosures, and publicly available information. For advisors, this means that more judiciousness is required in terms of selection. 

Another complicating factor is that alternative investments are generally illiquid. While this does likely contribute to the asset class’ enhanced returns, it means that funds cannot be easily withdrawn with long lock-up periods in many cases. An additional risk is that many alternative investments deploy large amounts of leverage which mean there is a greater risk of a blow-up in the event of a rate shock or bear market. 

Finsum: Alternative investments outperformed stocks and bonds over the last decade. Yet, there are some risk factors that investors need to consider.

A recent blog post by the UBS Chief Investment Office analyzed the performance of active fixed income managers in 2022. Given the rise in rates and challenging macro environment, it’s not surprising that there was a large dispersion in returns which rewarded active managers who were able to successfully navigate the turbulence. 

Another factor contributing to this dispersion was the outperformance of short duration bonds as compared to longer duration ones. Similarly, floating rate bonds also outperformed vs fixed rate. In municipal and corporate debt, higher quality outperformed lower quality. 

As a result, many active fixed income managers were able to outperform their benchmarks. However, there are some challenges when it comes to assessing active manager performance. Fro one, fixed income indices’ individual holdings are often illiquid and don’t reflect transaction costs. 

With these caveats in mind, there are still some important takeaways to consider. Active managers tend to perform better in less efficient markets, where there is more opportunity for alpha. Additionally, active managers tended to outperform when they had more flexibility to take advantage of various drivers of potential outperformance. 

Finsum: Active fixed income managers outperform vs passive indices in 2022. Here are some reasons why.