After a tough year for the markets, asset managers are bracing for cost-cutting in 2023. Revenues were down across the industry last year as falling markets hit both management and performance fees. In the U.S., total assets in mutual funds and ETFs dropped 17 percent between the start of 2022 and the end of October, according to data from the Investment Company Institute. This will force asset managers to cut costs and make tough decisions this year about how to grow. Some asset managers are predicting that the downturn will accelerate the shift by clients from mutual funds and brokerage accounts to other ways of investing, such as ETFs, separately managed accounts, and model portfolios. Martin Small, head of BlackRock’s US wealth advisory business and the firm’s incoming chief financial officer, told Financial Times, “Whenever there are super shocks in the market, people make big changes to their portfolios. This is when people do deferred maintenance. In U.S. retail markets, there is a move from brokerage accounts to fee-based advisory, which means more model portfolios and more ETFs.”

Finsum:After a tough year in the markets, some asset managers are predicting a shift towards model portfolios, ETFs, and SMAs for clients.

Self-directed everyday investors (as well as advisors) are getting access to some pretty powerful tools. Listen to Jack Swift discuss how TIFIN uses AI to identify signals to improve the whole experience. 

One of the big investment stories of 2022 was the failure of the 60/40 portfolio. Once a beacon of stability, the portfolio failed to provide safety last year as both the equity and fixed-income markets had negative returns. So, asset management firms are now suggesting higher alternative asset allocations to achieve greater diversification for investors. Daniel Maccarrone, co-head of global investment manager analysis at Morgan Stanley, said the following in research released by the firm, “Alternative strategies, such as those focused on hedge funds, private capital, and real assets, have long been appealing as a potential source of higher yields, lower volatility, and returns uncorrelated with stocks and bonds.” His research showed that adding alternative exposure to a portfolio may reduce volatility and potentially increase returns. Alternatives such as hedge funds, private debt, and real assets are less likely to be volatile since they are less subject to interest rate fluctuations. For instance, data from January 1, 1990, through December 31, 2021, showed that a portfolio of 40% stocks, 40% bonds, and 20% alternatives experienced annual portfolio volatility that was 88 basis points less than a 50% stock, 50% bond portfolio split. It also outperformed the 50-50 portfolio by 45 basis points annually.

Finsum:With the 60/40 portfolio failing to provide safety last year, asset management firms are recommending that investors include alternative allocations for diversification and lower portfolio volatility.

Investment advisor and banking solutions provider Save recently announced that it launched a savings product that is focused on ESG investing. The firm said in a recent press release that its "Market Savings program offers an option that provides a yield from iShares ESG Aware exchange-traded funds (ETFs) and other ETFs.” According to the press release, the ESG Market Savings portfolio aims to maximize environmental, social, and governance characteristics and exclude companies with certain practices. The release also said that since the launch of this ESG portfolio, about 10% of the people who have signed up for Market Savings have selected the Save ESG portfolio. Save Founder and CEO Michael Nelskyla said the following in the release, “Consumers are increasingly turning to ethical choices in all aspects of life including investments. We see it as our fiduciary responsibility to offer ethical investing through our Market Savings program for those consumers who seek these choices.” The Market Savings program on Save’s Savetech platform offers a yield that varies according to underlying market performance. It also noted that customer deposits are FDIC insured.

Finsum:Save announced that it launched an ESG Market Savings portfolio that aims to maximize environmental, social, and governance characteristics and exclude companies with certain practices.

According to Cerulli Associates' U.S. Exchange-Traded Fund Markets 2022 report, active fixed-income ETFs present a massive opportunity for firms. Daniil Shapiro, a director in product development at Cerulli, said in a recent interview that "a mix of factors" have combined to create the opportunity. He stated, "You have investors that are showing an increased preference for the ETF structure and they're increasingly open to accessing fixed income through the ETF structure. At the same time, you have interest rates that are increasing, which makes fixed income more attractive to investors." The report was based on polling Cerulli conducted in the third and fourth quarters of last year. It revealed that among advisers using ETFs, the portion using U.S. fixed-income ETFs has continued to increase, with 70% reporting such use in 2022, up from 63% in 2021. In addition, when ETF issuers were asked to gauge key drivers of fixed-income ETF flows over the next 24 months, greater adviser familiarity with fixed-income ETFs topped the list, cited by 66% of respondents. The second biggest driver was the increased use of fixed-income ETFs by institutions, which was cited by 55% of respondents.

Finsum:According to a new report by Cerulli Associates, active fixed-income ETFs present a massive opportunity for firms due to investors preferring the ETF structure and fixed income being more attractive with higher rates.