In an article for AdvisorPerspectives, Larry Swedroe of Buckingham Wealth Partners discussed the conundrum of ESG investing. In essence, the asset class is currently outperforming which many are interpreting as a validation of ESG’s promise. 

Yet, Swedroe contends that this conclusion is incorrect, since it doesn’t include the effect of increased inflows. In fact, a recent study from Norway’s oil fund revealed that non-ESG stocks actually delivered superior returns over a longer time period. One potential explanation is that inflows lead to increased valuations for ESG stocks, while it leads to depressed valuations for non-ESG stocks. 

Another explanation for the conundrum is that ESG stocks are less risky, because they on balance tend to have higher compliance standards and risk-management protocols. In the long-term, stocks with higher risk profiles tend to have better returns albeit with increased volatility. 

Companies with higher ESG scores also tend to be larger than companies with lower scores. This is another complicating factor as smaller companies tend to deliver higher returns over the long-term due to the risk premium. 

Overall, investors should understand that ESG outperformance is likely to be a short-term phenomenon due to the surge of inflows. Over the longer-term, the asset class could see lower returns due to a lower risk premium.

Finsum: ESG investing is booming, and many believe the asset class will continue to outperform. Larry Swedroe explains why it’s not so simple.

In an article for John Hancock Investment Management, Steve Deroin, the Head of Asset Allocation Models and ETF Strategy, discusses why he believes active fixed income will see a strong decade of growth as it’s uniquely positioned for the current market environment. 

Active ETFs are a small share of the total market, but they are rapidly growing. It provides the benefits of the ETF structure, while being more responsive to a volatile market environment. Currently, active ETFs have 5.3% market share but received 14.4% of net inflows in 2022. Additionally, they accounted for 63% of all new ETFs in 2022 which is the 3rd straight year that active offerings outpaced passive ones. 

In the fixed-income market, active ETFs offer exposure to bonds with more liquidity, transparency, and lower costs. Many passive fixed income ETFs don’t offer exposure to higher-yielding instruments and are instead concentrated in Treasuries and mortgage-backed securities. 

Thus, given these trends and a much more volatile market environment, the active fixed income ETF segment will continue to rapidly grow. 

Finsum: Active fixed-income ETFs are growing faster than passive fixed-income and active equity ETFs. Expect this trend to continue over the next decade.

In an article for ETFTrends, Mark Hackett discussed whether fixed income can rally given the backdrop of rising inflation and rates. These are potent headwinds for the asset class given that both factors reduce the value of future income and principal. 

Of course, this is a major change after a decade of zero percent rates and inflation under 2%. Under these macro conditions, fixed income consistently delivered strong returns for investors with minimal volatility. In addition to these headwinds, there is also an increase in geopolitical tensions, re-shoring of supply chains, a nascent banking crisis, and a slowing economy which could stumble into a recession.

Despite these challenges, investors should still retain a considerable allocation to the asset class. In fact, fixed income has performed well since the middle of 2022 especially as inflation is trending lower, while the market is pricing in rate cuts by the end of the year. Additionally, fixed income is offering yields that are above that of equities. 

Due to these developments, fixed income investors can earn above-average returns with minimal risk given the yields in short-term Treasuries and corporate debt.

Finsum: Fixed income ETFs struggled in 2022 due to rising rates and inflation. Despite some headwinds, there are some silver linings for the asset class.

In an article for ThinkAdvisor, Sudipto Bannerjee, Ph.D. and the VP of Retirement Thought Leadership at T. Rowe Price, distilled some advice for advisors on how to educate clients about annuities. 

Recent research indicates that 70% of retirees are managing their money with the intention to preserve assets. While most of the discussion is about saving or investing, more important is how retirees will choose to spend their savings.

Given this reality, annuities offer major advantages since it comes with longevity protection, tax advantages, and potentially even income guarantees. It also reduces the risk that retirees will exhaust their savings. 

The research indicates that retirees prioritize asset presentation, and it has a major impact on well-being. And, they cite running out of money as their biggest fear. Thus, annuities can be useful to accomplish both objectives. 

We can see how this plays out by comparing the performance of retirees who have a pension against those that don’t. After 18 years of retirement, retirees with a pension only saw a 4% drop in assets, while those without a pension saw a 34% reduction in total assets. 

Finsum: Annuities are a great option for investors especially since a guaranteed income leads to increased preservation of assets. 

Yo: model portfolios. You’re on a proverbial roll. 

In recent years, the acceleration of third party model portfolios has been the bomb, according to wisdontree.com. Over the last five years, assets in model portfolios -- leaving out nary a one – have spiked a minimum of 18% annually, estimated Broadridge. Over the next five years, they’re expected to roll past $10.3T in AUM.

That said, even in light of this growth, advisors are questioning their ability to leverage third party models in the practice, dwelling on, for instance, “which of my clients are a good fit for third-party models?”

To abet their ability to manage client investments, advisors can cherry pick from a burgeoning cocktail of model portfolios, according to thinkadvisor.com.

As of March of last year, there was nearly $350 billion in model portfolios, Morningstar reported in June. That’s a leap of 22% over the nine months before. As of November of last year, more than 2,500 models were covered in the firm’s database – more than doubling the amount the prior two years.