According to a Natixis Investment Management survey of fund selectors globally, self-reported use of third-party managers grew from 11 percent in 2021 to 24 percent in 2023. This was partly due to the demand for model portfolios as 72 percent of respondents reported that their firm offers some sort of model program. Natixis surveyed 441 professional fund selectors managing over $30 trillion in total client assets at wealth management, private banking, and insurance platforms globally, including 43 based in Asia. The survey also revealed that in Asia, fixed income is a highly favored asset class due to the strong demand for yield. Sixty-three percent of fund selectors in the region say they will increase investments in government bonds, while 54 percent will increase allocation to investment-grade corporate bonds. Another area of focus in the survey was alternatives. Six in ten respondents in Asia say they are recommending increased allocations due to greater market risks. Within this asset class, fund selectors are most likely to increase allocations to infrastructure at 60 percent, private equity at 32%, absolute return strategies at 32%, and commodities at 32%. ESG investing is expected to see the largest allocation boost with 61 percent of fund selectors seeking to increase allocations and 77 percent seeing increasing demand for impact investments.

Finsum:According to a new study from Natixis, self-reported use of third-party managers grew from 11 percent in 2021 to 24 percent in 2023 partly due to an increased demand for model portfolios.

One of the big stories of 2022 was the failure of the 60/40 portfolio. The 40% allocation to bonds is supposed to help protect investors during downturns, but during markets like last year where both stock and bonds fell, the portfolio failed. Now, strategists are looking for ways to improve the 60/40 portfolio. In a recent panel discussion at the New York Stock Exchange, industry experts spoke about “The Rise of Alternatives and the New 60/40 Portfolio.” Asset management professionals and advisers talked about methods to diversify and target new sources of income for retirement savers. Kimberly Ann Flynn, the managing director of XA Investments, said “An available alternative is a mutual fund wrap with added investments such as managed futures and commodity futures, which exist in the category of liquid alternatives.” She added, “I think with now this big push again looking at 60/40, it’s just diversification away from U.S. equity. I think some of these liquid alternatives are going to see a resurgence. In terms of performance, long-short equity performed well, on a relative basis and absolute basis. Some of the managed futures strategies performed really well.” Brian Chiappinelli, a Managing Director at Cambridge Associates, said that another alternative gaining momentum is the collective investment trust (CIT). He stated that “CITs have more leeway to add alternatives that are customized to a particular employee demographic.”

Finsum: After the blood bath in 2022, asset managers and advisors are looking for new ways to improve the 60/40 portfolio, including adding alternatives such as managed futures, commodity futures, or utilizing a CIT.

While many investors who care about the environment have piled money into funds that focus on ESG strategies, they probably don’t know how much they are paying. That is according to a new study, which found that “at the average ESG fund, the effective fees can be three times what’s reported.” The reason for this is that ESG funds are nowhere near as pure as they look to be. According to a new Harvard study, on average, ESG funds have 68% of their assets invested in “the exact same” holdings as non-ESG funds. So, for every dollar you invest in an ESG fund, a little less than a third goes into stocks you could have gotten in a fund that isn’t ESG. The average ESG U.S. stock ETF charges 0.17% in annual fees, according to Morningstar, 0.05 percentage points more than non-ESG funds. Finance professor Malcolm Baker of Harvard Business School, one of the study’s authors, said, “Although only about a third of your money in the average ESG fund is distinctly green, you incur the fees on the entire portfolio. Therefore, you’re really paying three times as much for the thing you care about, the differentiated piece of the portfolio.”

Finsum:A recent study found that on average, 68% of holdings in ESG funds are the exact same as holdings in non-ESG funds, which makes these funds three times more expensive than you think.

Last year was a tough year for bond investors, even pension funds. With the Bloomberg U.S. Aggregate Bond index down 14.6%, funds had to look elsewhere to bolster returns. According to a recent Pensions & Investments survey, a significant portion of defined benefit plans reported smaller bond portfolios as of September 30th, with many dropping more than 20%. For instance, the $430.4 billion California Public Employees' Retirement System (CalPERS) saw its U.S. fixed-income exposure drop 38.3% in the year ending on September 30th to $77.2 billion. In addition, the $288.6 billion California State Teachers' Retirement System saw its domestic bond exposure fall 12.9% in the 12 months ending on September 30th to $41.3 billion. With pension funds not wanting a repeat of 2022, many are turning to active bond strategies. For example, CalPERS is looking toward active management to turn things around. The pension fund's active and passive fixed-income exposure amounted to $77.4 billion and -$206 million as of September 30th, 2022, compared to $91.6 billion and $33.6 billion a year earlier. Arnold Phillips, managing investment director for global fixed income at the pension fund, noted that the current market could provide "opportunities to tactically deploy assets when managed through an active risk governance model," which could help turn performance around.

Finsum:With pension funds seeing their bond exposures plummet last year, many are turning to active fixed-income strategies this year in the hope of turning performance around.

Last year was a dismal year for fixed-income funds as bonds had their worst year on record. But this year, bonds are regaining steam partly due to an inverted yield curve. Fixed-income ETFs saw roughly $26 billion in inflows last month. Todd Rosenbluth, head of research at VettaFi, told Mike Santoli on CNBC’s “ETF Edge” that “There’s now income within the fixed income ETFs that are available. We’ve seen higher-quality investment-grade corporate bond ETFs. We’ve seen high-yield fixed-income ETFs see inflows this year, as well as some of the safer products.” For example, the 10-year Treasury yield was trading at 3.759%, while the yield on the 2-year Treasury rose to 4.644% on Wednesday. In addition, the yield on the 6-month Treasury hit 5.022%, its highest level since July 2007. With yields at their highest in decades and lofty stock valuations, investors are looking for areas of strength in the market. In the same ETF Edge segment, James McNerny, portfolio manager at J.P. Morgan Asset Management, added “When we break down the flows that we’re seeing, we’re seeing flows into higher-quality, longer-duration products, and credit products on the front end of the curve. Those have been the lion’s share of the majority of the flows that we’ve seen.” Jerome Schneider, managing director at Pimco, told CNBC “That fixed income funds are gaining popularity because they offer investors attractive yields in an uncertain economic environment.”

Finsum:With yields at their highest in decades, bond ETFs are seeing strong inflows as investors seek income in an uncertain economic environment.