In the past few years, the bond market has experienced increased turbulence as the U.S. Federal Reserve embarked on an unprecedented tightening cycle, successfully driving down inflation from 9.1% in June 2022 to 3.4% by the close of 2023. Despite the Fed's efforts to maintain stability since July 2023, fixed-income markets remain volatile, particularly in the 10-year U.S. Treasury yield. Throughout 2023, bond yields underwent significant fluctuations, reflecting market instability despite ending the year close to where it began.

Looking forward, uncertainties persist regarding economic growth and interest-rate policies, emphasizing the need for active management within fixed income. Prioritizing high-quality investments remains crucial amid mixed economic indicators and narrowing high-yield spreads, suggesting a prudent approach to portfolio diversification. 

Furthermore, strategies involving duration positioning and sector rotation offer opportunities for active managers to capitalize on shifting market dynamics, highlighting the importance of adaptability and responsiveness in navigating bond markets.

Finsum: Fund managers can lean into historical analysis and precedent in volatility and factor selection could lead to more robust returns for active management.

When transitioning between custodians, advisors need to be on the lookout for options that could improve their practice. One of the first things to look out for is discussions around a pricing strategy rather than resorting to fixed rates marking the inception of our the plan. RIAs should look for custodians that understand their unique business before proposing a suitable pricing structure. 

A good custodian will seek insights into operations before tailoring pricing. Personalized solutions will consider a variety of factors that lead to custom solutions such as growth stage and client dynamics. By embracing flexibility and collaboration, RIAs can feel empowered when navigating custodial transitions effectively, ensuring a prosperous future for their businesses.

Look for custodians that are open to this flexibility when it comes to this sort of pricing structure and make sure they understand your business when changing providers. 

Finsum: Clients are seeking flexibility and understanding with their advisors and RIAs should look for a similar approach when it comes to custodians. 

Direct indexing, via separately managed accounts, is rapidly gaining traction as an investment strategy in the United States, particularly beneficial for those with significant holdings in company stocks, and is already proving to be major movement among prominent investment firms in 2024.

This approach allows investors to replicate index performance while retaining control over individual securities, utilizing automated programs for systematic trading. Once limited to the ultra-wealthy, recent technological advancements have made direct indexing accessible to investors of varying levels, with assets projected to reach $2 trillion by 2024.

Direct indexing offers customization, diversification, and risk mitigation, enabling investors to tailor portfolios to their preferences and goals while reducing reliance on specific stocks. With its tax efficiency and customization benefits, it’s easy to see why it’s so appealing in an SMA format and companies like Goldman Sachs are already making huge strides in this subsector. 

Finsum: The hybridization of products has been one of the defining features of the 2020’s and integrating vehicles like SMAs with direct indexing will continue the rest of the decade. 

Cerulli Associates' recent report predicts substantial growth for structured notes, debt securities linked to underlying assets, in the upcoming year, prompting advisors to take heed of this emerging trend. 

Despite their reputation for being illiquid, inaccessible, and costly, structured notes are gaining traction, with only about 22 percent of advisors currently incorporating them into their strategies, but the landscape is changing, with roughly 8 percent of advisors planning to adopt structured notes within the next year matching industry standards with the likes of hedge funds and private debt. 

While alternative investments pose challenges for many clients, Cerulli's findings reveal advisors' concerns about the lack of liquidity and product complexity associated with structured notes, alongside hurdles related to expenses and subscription/redemption processes. Nonetheless, asset managers are adapting by targeting retail investors and partnering with advisory firms to introduce structured notes capabilities. Advisors could be missing out on a key alternative to improve the performance of clients portfolios. 

Finsum: Liquidity concerns should come down as the interest rate schedule becomes more certain and advisors should consider assets that are traditionally less liquid such as structured notes.

With private credit booming, private equity firms are upping their forecasts for their lending businesses. Apollo Global sees loan origination exceeding $200 billion annually in the next couple of years, up from its previous forecast of $150 billion. It’s seeing increased loan demand due to faster economic growth and public and private spending on infrastructure.

What’s new is that many of these private equity giants are now looking at lower-risk lending to investment-grade companies to fuel growth. This would put them in even more direct competition with banks. Apollo’s co-President Jim Zelter sees many investment-grade domestic companies pursuing capital expenditure projects and believes that private credit can compete with fixed income and equity as funding sources.

Already, banks are feeling some impact. In Q1, JPMorgan reported $699 billion in non-consumer loans outstanding, which was a $3 billion decline from last year. CEO Jamie Dimon has warned that the entry of new lenders brings ‘an area of unexpected risk in the markets.’ 

Previously, he noted that these lenders have less transparency and regulations than banks, which ‘often gives them a significant advantage.’ He specifically cited startup banks, fintech companies, and private equity firms as examples of companies that function effectively as banks but are outside of the regulatory system. 

Finsum: Private credit is taking market share away from banks. Now, private equity firms are looking to target investment-grade companies. Many banks are warning that this brings risks to the financial system.