Save the risky business for the movies.

With little risk linked to it, active fixed income is one reason investors are attracted to it, according to assetnvesting.net.

What’s the scoop here? Well, it guarantees the capital of investors and reduces --  and not just a little – the insecurity that it can dispense in the event that if, for one thing, an equity investment’s opted for.

It doesn’t stop there. Additionally, the fixed income shells out a return. While it might not be robust when weighed against other investments, it boasts a reputation ahead of time. That matters since, because of it, investors are positioned to previously know the results it will secure. For conservative investors, it’s what they opt for first.

And talk about versatility. Tactical responses to a cocktail of market climates and shifts in regimes are facilitated by an active approach, according to troweprice.com. On top of that, it dishes out the flexibility to leverage pricing anomalies and dislocations that a volatile climate might generate. Additionally, curve positioning could be a good idea to mull.

Category: Eq: Market, 

Keywords: active, investors... etc.

In a piece for AdvisorEdge, James Langton discusses how banks are tightening their lending standards which could present an opportunity for alternative investment managers. According to a report by Fitch Ratings, there is a surge in interest for private debt from borrowers. In North America, private credit funds’ assets under management increased from $242.7 billion in 2010 to over $1 billion at the start of the year. 

And, this trend should only accelerate in the coming years especially as regional banks are a key source of funding, and many are struggling with an inverted yield curve. The crisis in regional banks earlier this year underscored their perilous position. Thus, it’s not surprising to see a flurry of new private credit funds. In the second quarter, 34 new funds were launched, raising $71.2 billion, more than double what was raised in the first quarter. 

Private credit is more insulated from rising rates due to its reliance on floating rate-loans. Additionally, default rates have remained at historically low levels at 1.6% in Q2 and 2.2% in Q1, indicating that the overall economy remains resilient and rewarding investors in these funds. 

Finsum: Funding from banks is increasingly difficult to access given tighter credit standards and challenges for regional banks. This is creating an opportunity for alternative investment managers as private credit funds step into the void.

The first-half of the year saw the energy sector underperform due to various headwinds such as the crisis in regional banks, concerns of a recession, high rates, tight monetary policy, stubborn inflation, etc. The second-half of the year has seen energy outperform as economic data continues to come stronger than expected and inflation has moderated, leading to more confidence that a soft landing outcome is likely.

For instance, crude oil started the year at around $80 per barrel but spent most of the first-half, trading between $60 and $70. In the second-half of the year, oil has traded between $70 and $80 for the most part. 

In terms of the outlook for crude oil for the rest of the year, the major bullish catalysts are reduced output due to OPEC+ cuts while demand should remain resilient especially if a recession is avoided. However, there is a bearish catalyst on the horizon due to increasing concerns that China could already be in a recession. 

Recent data coming out of the country has been quite poor. This has been underscored by the 8.5% decline in property investments and defaults from some high-profile developers. Retail sales data also missed badly at 2.5% growth vs expectations of 5.3%. Another concerning datapoint is the 14.5% decline in the country’s exports. These trends could undermine the nascent rally in crude oil given that it’s a major source of demand.

Finsum: Crude oil prices have enjoyed a nice rally in the second-half of the year, however a weakening Chinese economy could result in the rally fizzling out. 

Although 2022 was the worst year for bonds in recent history, there are some silver linings for fixed income investors according to WisdomTree’s Andrew Okrongly and Behnood Noei who are the firm’s director of model portfolios and fixed income, respectively. These are the highest yields in decades which is bringing ‘income back to fixed income portfolios’ and the potential for significant returns. The second is reduced duration risk given that short-term bonds are offering generous yields.

The current environment is significantly different from what prevailed for much of the last 2 decades when bonds both trended higher with minimal volatility. However, the asset class became less appealing due to higher levels of duration risk in addition to miniscule yields. As a consequence, many fixed income investors went further out on the risk curve to find yield whether it was junk bonds, EM debt, or dividend-paying stocks. 

Now, investors can find much higher levels of yield with much less risk. Therefore, fixed income can return to its traditional role of providing income and safety in portfolios. In fact, it’s a rare circumstance that shorter-term bonds are offering much higher yields than longer-term bonds with less risk. And, these conditions should persist given current Fed policy and the economy’s resilience. 

Finsum: Investors should consider short-duration fixed income model portfolios given that they are offering higher yields with less duration risk. 

In one corner of the investment world: the traditionalists; in the other, the alternatives.

A survey of 191 investment professionals from February 14, 2023 to April 7of this year showed a mounting interest in alternative investments among professionals, at 28%, predating the pandemic, according to thestreet.com.

"As traditional stock and bond asset classes suffered from losses and volatility in 2022, it's not surprising that interest in alternative investments increased among financial professionals. However, overall use of alternatives remains relatively low,” 2023 FPA President James Lee, CFP, CRPC, AIF, said in a press release.

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While alternative investments are catching the attention of some financial advisers, the survey highlighted that over 90 percent of investment professionals currently use or recommend exchange-traded funds (ETFs).

Unlike traditional assets, of course, alternative investments aren’t subject to US Securities and Exchange Commission regulatory requirements, according to coresignal.com. That’s significant since it translates in further room for speculative investment practices.

There’s a scant link between alternative assets and the stock market – not to mention other conventional investments, according to coresignal.com. Consequently, they’re not required to react to market conditions as they shift. For conventional securities, it’s a different story.

Alternative investments, fueled by high fees and minimums, typically are accessible to institutional investors exclusively.

No bi week for Reg Bi, no siree.

Bill St. Louis, executive vice president and head of the National Cause and Financial Crimes Detection Program at FINRA, recently announced the intention of the organization to hold Reg Bi compliance exams of 1000 broker-dealers, according to natlawreview.com. They’ll take place by year’s end.

While on the books for nearly three years, enforcement actions under the rules has generated little action from FINRA.

Christopher Kelly, FINRA’s acting head of enforcement, said there will be no new standard applied in the enforcement actions.

“Both Reg BI for broker-dealers and the IA fiduciary standard for investment advisers are drawn from key fiduciary principles that include an obligation to act in the retail investor’s best interest and not to place their own interests ahead of the investor’s interests,” the SEC states in a staff bulletin released in late April, reported investmentnews.com.

From the staff’s perspective: “although the specific application of Reg BI and the IA fiduciary standard may differ in some respects and be triggered at different times, they generally yield substantially similar results in terms of the ultimate responsibilities owed to retail investors.”

You’ve heard of the theory of relativity. Just a hunch, of course. How about model portfolio theory? And how does it work?

Well, it abets the ability of investors to tamp down on market risk and wring the most out of return, according to forbes.com.

On one hand, investors can erect optimized portfolios with modern portfolio theory, on the other, however, are there limitations? Yep. 

For example, estimates – all of them – stem from historical data that might have nothing to do with current or markets down the road.

The “perfect investment” can be a tough nut to crack.

That said, modern portfolio theory’s been highly popular, according to Investopedia.com.

It’s contended by modern portfolio theory that, possibly, an ideal portfolio that hands investors maximum returns by tacking the optimal amount of risk, can be designed.

When it comes to diversifying securities and asset classes – on top of the benefits of stopping short of putting your eggs in the old basket -- MPT’s a big supporter. 

LPL Financial topped earnings expectations in the second quarter as it reported $3.65 in earnings per share which exceeded analysts’ estimates of $3.47 per share. It was also an 85% increase from last year, primarily driven by higher rates. The company also had another strong quarter in terms of recruitment which the firm expects to continue in the third quarter. 

In total, it added 421 new advisors in Q2 for a total of 21,942. Notably, this is more than a 5% increase on a year-over-year basis as it had 20,811 at the end of last year’s Q2. It saw an 8% increase in total assets, reaching $1.2 trillion with organic new assets of $22 billion and recruited assets of $19 billion. 

According to CEO and President Dan Arnold, the company’s success was due to winning new clients, expanding ‘wallet share’, focus on servicing clients, and a differentiated experience. It also saw a 99% retention rate in the quarter, and the company continues to invest in new technology and new services such as direct indexing. It also announced the acquisition of Crown Capital which has 260 advisors and $5.5 billion in assets. 

Finsum: LPL Financial announced its second quarter earnings results which topped analysts’ expectations in terms of earnings per share and asset growth.

We are seeing a flurry of active fixed income ETF launches over the past few months. While it’s nearly settled that with equities, passive tends to outperform active strategies, active fixed income strategies have performed better than passive fixed income especially in recent years. 

Further, there is considerable uncertainty around the economy regarding rates, inflation, and a potential recession which could lead to more opportunities for active managers. Additionally, active managers have more latitude in terms of duration and credit quality.

Therefore, money is flowing into active fixed income ETFs from mutual funds and passive bond funds. For Barron’s, Lauren Foster discusses whether these inflows into active fixed ETFs will continue or is it just a short-term fad. 

Money is likely to also flow into active fixed income ETFs from active fixed income mutual funds given that the ETFs offer several benefits such as lower fees, more transparency, and intraday liquidity. The younger generation of investors also tend to favor ETFs rather than mutual funds due to higher comfort levels and an understanding of how high fees can impact long-term performance. 

However, the ultimate factor is whether these ETFs will continue to deliver strong returns relative to passive fixed income ETFs and active fixed income mutual funds. So far, they seem to be offering the best of both worlds to investors. 

Finsum: A major theme in 2023 has been the rise of active fixed income ETFs. But, there is considerable doubt whether these will gain traction and are better than passive fixed income ETFs or active fixed income mutual funds.

Strive Asset Management, an upstart competitor to Blackrock and Vanguard, is launching its first fixed income ETFs. Strive is based in Ohio and was founded in 2022 by Vivek Ramaswamy who is now running for President in the Republican Primary. Ramaswamy resigned from the firm earlier this year to focus on his political ambitions, but Strive’s mission and his political campaign clearly have some overlap.

Ramaswamy and Strive are both defined by their opposition to ESG investing and believe that it’s a detriment to investors and the country. Therefore, he’s been critical of asset managers like Blackrock and Vanguard who use their passive stakes in companies to encourage management teams to consider ESG factors when making decisions.

In contrast, Strive and Ramaswamy believe that companies should focus on maximizing profits rather than other factors. Its first 2 fixed income ETFs are the Strive Enhanced Income Short Maturity ETF (STXT) and the Strive Total Return Bond ETF (BUXX). STXT provides total exposure to fixed income with a cost basis of 49 basis points, while BUXX is designed to generate yield for investors by investing in short-duration bonds and charges 25 basis points.

Finsum: Strive Asset Management is launching its first 2 fixed income ETFs. The company differentiates itself by eschewing ESG and rewarding companies that don’t use these metrics.