FINSUM
Vanguard: 50/50 Portfolio Offers Best Odds of Success
Much has been talked about regarding the failure of the 60/40 portfolio last year, but Vanguard analysts recently suggested that investors shouldn’t abandon a balanced portfolio strategy. Roger Aliaga-Diaz, portfolio construction head for Vanguard, and his team said in a recent note that “A balanced portfolio still offers the best chance of success.” Aliaga-Diaz noted that while the negative correlation between stocks and bonds broke down last year, “longer term, however, the data support balanced portfolios.” The firm noted that “The policy response to higher and more persistent inflation and the subsequent repricing of risk in global capital markets has led to a dramatic shift in our time-varying asset allocation (TVAA) outlook.” The TVAA looks to harvest the risk premiums for which the Vanguard thinks there is modest return predictability. Based on the firm’s current outlook, Vanguard’s optimal TVAA portfolio “calls for a 50/50 stock and bond split, and favors bonds and emerging markets.” Specifically, Vanguard’s TVAA allocation suggests 30% U.S. stocks, 20% international (divided equally between developed and emerging markets), 22% international bonds, and 27% U.S. fixed income (mostly in U.S. intermediate credit bonds). The firm noted that the interest rate tightening cycle in 2022 raised its expected bond return forecasts by more than the equity sell-off raised expected equity returns.
Finsum:While the 60/40 portfolio failed last year, Vanguard believes a balanced portfolio still offers the best chance of long-term success and recommends a 50/50 stock and bond split.
Morningstar CEO: Direct Indexing Makes Investing Fun
In a recent interview with ESG Clarity, Morningstar CEO Kunal Kapoor offered his thoughts on direct indexing and how custom features could lead to more people being interested in investing. Kapoor mentioned that while separate accounts were always touted as providing customization, in reality, most separate accounts did not provide much customization. That’s why he is so excited about direct indexing. He stated that, “the cool thing about building a direct index is that at the start, the adviser’s having this conversation with the client, not only about the risk profile, risk tolerance, time horizon – but suddenly the conversation is about preferences.” He believes that these preferences get clients engaged with their advisors. He said, that it can “allow an adviser to really drill into an individual’s preferences in an educated way – really walkthrough for the individual what the pros and cons are of implementing those preferences in a portfolio.” Kapoor also compared direct indexing to passive investing. He believes that while passive investing can be good for most people, it can take the fun out of investing. Direct indexing, on the other hand, has many of the benefits of passive investing, but it brings back the fun of making choices.
Finsum:Morningstar CEO Kunal Kapoor believes that direct indexing creates more engagement between advisors and their clients since it requires them to discuss preferences.
ESG Reckoning Looming for Investors of Chinese Companies
If your clients are invested in Chinese companies and have a preference for ESG, it may be time for a change in their portfolios. It appears sustainability rules in western countries are at odds with what’s happening in China. While Chinese equities offer strong growth potential, their ESG ratings rank lower than western nations and most emerging markets. For instance, Sustainalytics, a sustainable rating agency owned by Morningstar, downgraded three Chinese big-name tech companies on its watchlist in October. The three stocks, Tencent, Weibo, and Baidu, were moved to the category of “non-compliant with UN principles.” In addition, Hong Kong Watch, a UK-based group that researches investment and human rights issues in China, recently said in a report that “many of the biggest asset management, state pension, and sovereign wealth funds were passively invested in companies allegedly involved in the repression of Uyghur Muslims in China’s Xinjiang region.” The report found three major stock indices provided by MSCI included at least 13 companies that “have allegedly used forced labor or have profited from China’s construction of internment camps and surveillance apparatus in Xinjiang.” Another problem is that Chinese companies are less likely to respond to queries from ESG rating agencies.
Finsum:With ESG investing continuing to gain momentum, it appears that many Chinese companies are at odds with ESG due to censorship and repression in China.
PIMCO Strategist: Investment Grades are Sweet Spot for Bonds in 2023
After a tough year for fixed income, many bond strategists are expecting 2023 to be a great year for bonds. But where should advisors and investors look to invest? In an interview with Yahoo Finance Live, PIMCO Managing Director and Portfolio Manager Sonali Pier offered her perspective on where the sweet spot will be for bonds this year. She believes that despite potential volatility, “there’s a lot of room now for income-producing assets.” She stated, that “a sweet spot may be those Triple Bs within investment grade, for example, where dollar prices have come down a lot as a result of the interest rates rising as well as credit spreads having widened.” In the interview, she also talked about what areas of the corporate bond market to avoid. Her firm is most concerned with areas where there are “low multiples on businesses, low margins, high cyclicality, where it's very difficult to weather a storm like a recession when you have those types of things against you as well as still inflation as an impact.” She mentioned industries such as retail, autos, and wire lines to avoid that are seeing declines due to a “shift in investor demand as well as disruption from the supply chain.”
Finsum:PIMCO portfolio manager Sonali Pier believes that a sweet spot for bonds this year may be triple Bs within investment grade while avoiding industries such as retail, autos, and wire lines.
Hedge Funds to Navigate 2023 Inflation with Commodities and Bonds
Last year was a terrible year for the markets, even for many hedge funds. According to investment data firm Preqin, hedge fund returns were down 6.5% in 2022, the largest drop since the 13% decline in 2008 during the financial crisis. That’s why global hedge fund managers are preparing for persistent inflation by seeking exposure to commodities and bonds that perform well in inflationary environments. A majority of 10 global asset and hedge fund managers that were surveyed by Reuters said commodities are undervalued and should thrive as global inflation stays elevated this year. In addition, they are also seeking inflation-linked bonds to shield against price rises, and exposure to certain corporate credit, as higher rates restore differentiation in company bond spreads. For instance, London-based hedge fund manager, Crispin Odey is betting inflation will remain high. He told Reuters that "Commodities will start to rise again. They've sold off very heavily and are below operating costs in many instances." Danielle Pizzo, chief strategy officer at Schonfeld Strategic Advisors, told Reuters that her firm “Aims to focus more on investment grade and high-yield bonds this year as well as commodities.”
Finsum:Hedge funds, which saw the largest drop in performance last year since the financial crisis, are concerned about persistent inflation and are seeking exposure to commodities and select bonds.