JPMorgan upgraded the global energy complex to an ‘overweight’ rating as it sees the possibilities of an energy ‘supercycle’ due to low levels of CAPEX over the past few years and near-term supply shocks. The bank believes that Brent crude oil prices could reach $150 by 2026. It sees upside for major energy producers and operators like Shell, Baker Hughes, and Exxon Mobil.

Oil prices have risen in the second-half of the year with WTI crude oil exceeding $90. This places strain on consumers, adds to inflationary pressures, and complicates chances of a Fed pivot. Oil prices have maintained their gains despite increasing concerns that a recession may be materializing given soft labor and consumption data.

The biggest driver of prices has been stronger than expected demand coupled with OPEC production cuts. It sees a tight supply/demand dynamic lingering over the intermediate-term which means increased susceptibility to geopolitical shocks. Based on current trends, the bank anticipates a 1.1 million barrel per day deficit in 2025 which could widen to 7.1 million barrels per day in 2030. 

Finsum: JPMorgan sees the possibility of an energy supercycle due to demand remaining resilient and supply concerns.

Risk adverse?

Well, perhaps you’ve pulled up to the right window. After all, a big upside of active fixed income management: risk mitigation, according to npifund-com.

Possible problems – before they damage client portfolios – can be traded out of by alert active fixed income managers. What’s more, the site states: “We believe the next problem to address with active management is the leverage bubble in corporate debt. The disproportionately large BBB market, in   particular, “poses a risk to the markets in the event of a wave of downgrades under the right recessionary scenario.”

Meantime, it seems investment strategy and fixed income teams at Vanguard have been burning a little midnight oil.

According to corpaemdisp.essp.c1.vanguard.com, new research from the company’s teams taken a close look into how the growth of a diverse coupon stack in the municipal bond market, followed by, down the line, “aggressive Fed rate hikes put negative convexity front and center in active muni investing.”

Those active managers steering through this environment of souped up rates are gaining leverage. Why? Because they’ve been able to wrap their heads around how to manage negative convexity risk – and they’ve been prudent while they’re at it.  

The retiring type?

Yeah, well, not if you’re the retiree who created the Retiree Portfolio Model – an Excel spreadsheet that can be downloaded -- for retirees, according to bobleheads.org.

Seems as if Forum member BigFoot48, who developed the model, was onto something.

Homing in on a retiree and the lives of their spouse’s, it models their most common financial aspects. That includes pensions, Social Security benefits and living expenses. With that data, a model of their accounts over a period of one to 40 years is used.

With a feature of this model, the user can compare their normal portfolio results with that one includes alternative choices, like performing Roth IRA conversions and selecting alternative Social Security starting ages and benefits, not to mention buying a Single Premium Immediate Annuity.

And talk about visibility. Formulas and results – and that means all of them – can be viewed completely – not to mention the fact that they can be unprotected; paving the way to user customization.

Meantime, monitor the markets, you say? 

Um, among a good chunk of advisors, apparently not.

According to capitalgroup.com, in the U.S., some of the highest growth advisors are 40% more likely to leverage model portfolios in their practice. And that’s at the cost of monitoring the markets, into which they’re sinking less time.

Active fixed income is one of the fastest growing categories in terms of inflows and new issues. It’s taking market share away from mutual funds and passive fixed income ETFs. Now, Vanguard is adding to its active fixed income ETF lineup with the launch of 2 new active fixed income ETFs for later this year.

The Vanguard Core Bond ETF and Vanguard Core-Plus Bond ETF provide exposure to a diversified portfolio of bonds across sectors, credit quality, and durations. The Core Bond ETF will focus on US securities with small allocations to higher-risk areas like high-yield credit and emerging market debt. The Core-Plus Bond ETF will have greater allocations to riskier parts of the fixed income market. Each has relatively low expenses at 0.10% and 0.20%, respectively.

Each of these has a mutual fund counterpart and will be managed by the same management teams, share benchmarks, and have the same costs. Yet, they are considered distinct products. It’s simply a reflection that a portion of investors, specifically younger investors, simply prefer the intraday liquidity and ease of these products vs mutual funds.

Active fixed income is also seeing greater interest due to the current uncertainty regarding monetary policy and the economy’s trajectory. Active managers have greater latitude and more flexibility to navigate this environment in contrast to passive funds. 

Finsum: Vanguard is launching 2 active fixed income ETFs which are based upon successful mutual funds. The active fixed income category is rapidly growing in terms of inflows and new issues.

Equity and fixed income markets were battered following the September FOMC meeting where the committee left rates unchanged but the committee members’ dot plots for the future trajectory of monetary policy and Chair Powell’s press conference had a decidedly hawkish tilt. 

The message was that another rate hike is likely before year end and that rates are likely to stay elevated for longer. Thus, Fed futures markets reduced the odds of rate cuts in 2024, leading to pain for the long-end of the fixed income complex. In contrast, the short-end of the curve saw major inflows as investors look to shield their portfolio from volatility and take advantage of high rates. 

Following the Fed meeting, there was $25.3 million of inflows into the iShares Treasury Floating Rate Bond ETF which was about 40% of the total inflows in the previous month. This marks an acceleration of a trend which began last quarter of outflows from longer-term Treasury ETFs and inflows into short-duration Treasury ETFs. 

Supporting this notion is the uncertainty over the economy and monetary policy as this tends to lead to volatility for long-duration assets. Additionally, the flatness of the yield curve means that there isn’t sufficient compensation for the additional duration risk.  

Finsum: Most of the fixed income complex suffered losses following the hawkish FOMC meeting, but one exception was short-duration Treasury ETFs. 

One of the best real-time measures of the population’s interest in a subject can be gleaned through Google search data. Since the start of the year, searches for the topic are up by 50% and continue to climb with rates. In fact, there is a 0.9 correlation between search volume and longer-term rates.

According to Standard Life, interest in the topic really accelerated once rates exceeded 4%. Currently, many annuities are offering returns in the 7% to 8% range which is leading to strong demand from retirees or those close to retirement who are looking for income. 

Recent months have seen rates continue inching higher, while inflation expectations have moderated. Higher real rates are also adding to the appeal of annuities given concerns about the economic outlook and costs.

Two more contributing factors behind annuity demand are pent-up demand and demographics. For more than a decade, rates were so low that annuities simply didn’t deliver sufficient returns for investors or retirees. Instead, monetary policy was designed to push them higher up the risk curve in order to generate yield. 

Demographics also can’t be ignored. Next year, 12,000 Americans will be reaching retirement age every day. And by 2031, 70 million Americans will be above retirement age. The population is even older in Europe and Japan and will likely be interested in boosting their income during retirement. 

Finsum: Google search data shows that interest in annuities has surged since the beginning of the year. It’s not a coincidence that this happened as long-term rates were breaking out to multi decade highs. 

In an article for AdvisorHub, Lisa Fu covers a recent research report from Cerulli Associates which shows that portfolios managed by CIOs outperform those managed by advisors over multiple time frames. Over the last 3 years, model portfolios earned a 1.8% annual return which beat the 1% return of advisor-managed portfolios. The outperformance was similar on longer timeframes as well. 

Further, the outperformance was even stronger during periods of market volatility. During negative quarters over the last decade, model portfolios outperform 60% of the time. Model portfolio performance was also more consistent while advisor-led portfolios have much wider dispersion in terms of results. 

Of course, this is an indication that most advisors are better off using model portfolios which frees up more time to focus on operating a business, prospecting for new clients, and investing in client services and relationships. 

Many older advisors are resistant to giving up these responsibilities given that it was an integral part of the job for so many years. Yet, firms are encouraging younger advisors to go with model portfolios due to better outcomes for clients’ portfolios and more time and energy for tasks and actions that are more correlated with success.

Finsum: A research report from Cerulli Associates shows that model portfolios perform better than advisor-managed portfolios.

Although the advisor recruiting frenzy is certainly slowing down, two trends clearly standout. One is that LPL Financial has been a big winner with its variety of models and offerings for incoming advisors. The second is that Merrill Lynch has been a big loser with several high-profile exits.

This continued this week with two teams leaving Merrill Lynch who collectively manage over $1 billion in assets. The Coutant Group which is led by Kevin and Keith Coutant announced that they are leaving for UBS. The five-person group manages $700 million in assets with lead advisors Keith and Kevein having spent 23 and 20 years at the company, respectively. At UBS, they will be joining Soundview Wealth Management and continue operating in Connecticut. 

So far in 2023, UBS has recruited away nearly $4 billion in client assets from Merrill Lynch. Reportedly, the bank has been offering generous packages to brokers including guaranteed back-end bonuses and deals that are in the 400% range. 

The other major exit from Merrill was John Foley who managed $340 million in assets and left for RBC. According to reports, the exits are motivated by competitors offering more generous compensation and providing more freedom in terms of product recommendations and client relationships.

Finsum: Merrill Lynch has seen a steady stream of exits from advisors and brokers with large books. The latest are more than $1 billion in assets leaving for UBS and RBC. 

‘Higher for longer’ is the main takeaway from the FOMC meeting after the committee decided to hold rates. Members also signaled that another rate hike is likely before year end. Overall, there was a hawkish tilt to Chair Powell’s press conference as 2024 odds saw consensus expectations decline from 3 to 4 rate cuts to 2 to 3 cuts. 

FOMC members’ dot plots also show expectations of less easing in 2024. In June, it saw 2024 ending with rates at 4.6%. This was upped to 5.1%. The Fed did acknowledge progress in terms of inflation’s trajectory. Powell remarked that “We’re fairly close, we think, to where we need to get.”  

Fixed income weakened after the FOMC with yields on longer-term Treasuries jumping to new highs. Yields on the 10-year reached 4.48% and have broken out above the spring highs. The increase in yields has had negative effects on equities, specifically the financial sector and small caps. However, yields on shorter-term Treasuries haven’t risen above spring highs.

It’s an indication that markets are not expecting terminal rates to move materially higher but it’s adjusting to a longer duration of high rates. For fixed income investors, it likely means that volatility will persist in the short-term. 

Finsum: Longer-term Treasury yields are breaking out to new highs following the FOMC meeting. Expectations of meaningful Fed rate cuts in 2024 are being tempered. 

With major technological disruption happening in every industry, it’s natural to consider how the financial advisor industry will change over the coming decades. After all, the industry is unrecognizable to how it was a few decades ago. Here are some of the trends that will shape how the industry evolves. 

People, especially the younger generation, are increasingly spending more time in the digital world including when it comes to managing their finances. Many in this cohort would rather communicate with their advisors over text, email, or video calls. 

Artificial intelligence (AI) presents a threat and opportunity to advisors. AI is being used to augment robo-advisors and give them more interactive capabilities and personalized advice. While this could lead to some market share gains, advisors can also utilize AI to augment their own businesses by improving back-end operations, automating low-level processes, reducing expenses, free up time for client services, and boosting marketing efforts.  

Another major opportunity is the massive aging of the population and retirement of the baby boomer population. As this generation passes, trillions in wealth will be passed down to Generation Z and Millennials. Successful advisors will be able to form trust and relationships with older clients and their children.

Finsum: The financial advisor industry is going to face major challenges and opportunities over the next couple of decades. Demographics and technology are two of the most impactful.