Cohen & Steers believes that 2024 will mark a turnaround in private real estate following years of being plagued by issues like a drop in office occupancies and high interest rates. The firm emphasizes that real estate remains a cyclical business with many indications that we are near a trough in the cycle. It acknowledges that some pain is still coming as large amounts of debt will mature in the next couple of years and require refinancing, likely leading to more defaults and distressed assets. 

However, this will present an attractive opportunity for investors according to Cohen & Steers. The firm sees private real estate following the same trajectory as public REITs, lower prices in the interim before a gradual recovery as the Fed shifts to cutting rates later in the year. 

The firm favors newer properties in the sunbelt over older properties in coastal markets. It sees migration out of high-cost cities and into the suburbs continuing, facilitated by technology and remote work opportunities. 

In terms of various segments, it sees less opportunity in Industrial properties due to high prices and indications of a supply glut and lower occupancy levels. It sees office properties as continuing to struggle given unfavorable secular trends. Specifically, it recommends staying away from older office properties which were built for a different time and workforce.

Finsum: Cohen & Steers believes that private real estate is near the bottom, and that buyers at these levels will be rewarded in the long-term. 

With a strong recovery in fixed income over the past couple of months, fixed income fund managers are looking to generate inflows from the nearly $6 trillion that is sitting in money market funds. Some portions will certainly move into fixed income especially if interest rates start to move lower, and investors look to move further out on the curve to take advantage of still attractive yields.

Due to this, active fixed income funds delivered their biggest monthly returns in decades, leading to a surge of inflows. Recent economic data and chatter from FOMC officials have also been supportive of the asset class.

The challenge for managers is the explosion in active fixed income funds over the last few years, leading to price wars for market share and consolidation. Many are from the largest asset managers like Vanguard, State Street, and Blackrock, which have very low costs. Funds that aren’t able to sufficiently attract inflows over this period will only face more difficulties in the future in remaining viable. 

According to Rich Kushel, the head of Blackrock’s portfolio management group, “We are in a winner-takes-a-lot moment. If you’re truly adding real alpha, there will always be a place for you in this industry. For the folks who haven’t, you might as well buy [the benchmark].”

Finsum: There is nearly $6 trillion on the sidelines. Some of this will move into fixed income especially if rates start dropping. There will be intense competition among active funds to be a recipient of these inflows. 

Vanguard is launching 2 new ETFs giving investors exposure to the municipal bond market. The Vanguard Intermediate-Term Tax-Exempt Bond ETF (VTEI) and the Vanguard California Tax-Exempt Bond ETF (VTEC) launched on the CBOE BZX Exchange and are designed to offer targeted exposure to certain segments of the muni market with an emphasis on quality and yield. 

Both also have low expense ratios of 0.08%, making them among the least costly within the muni fixed income category. The intermediate-focused, tax-exempt ETF is particularly timely given expectations that interest rates will decline in 2024 due to a dovish Fed and weakening economic outlook. Thus, many investors are looking to lock in yields at these levels by moving out from the short-end into the intermediate and longer-end of the curve. 

In addition to quality and generous yields, municipal bonds also have tax benefits. While VTEI is designed to appeal to a wider swathe of investors, VTEC is for investors who want exposure to California municipal debt. The yield generated from this ETF is tax exempt at the federal and state level for California residents while also prioritizing credit quality. 

Finsum: Vanguard is launching 2 intermediate-term, municipal bond ETFs that offer investors tax benefits in addition to income and quality.  

The Center for Retirement Research at Boston College recently completed a study which investigated why annuities are under owned despite the benefits it provides for retirees. The findings are particularly interesting for financial advisors given this wide gap and persistent challenge. 

The study queried investors with more than $100,000 in financial assets who are in or near retirement. About half of the respondents indicated some willingness to buy an annuity at current rates, while only 12% actually are invested in one. 

Interestingly, the study also found that a lack of liquidity or the inability to pass on an annuity as an asset to heirs were not cited as reasons to not purchase an annuity. Instead, the major factor was a lack of knowledge of the product and how to buy one. Some who were more familiar with the product had a negative perception of hidden costs and performance issues.

According to the authors of the study, the reluctance to buy one stems mostly from psychological reasons. Advisors should endeavor to provide more detailed knowledge about these products including the mechanics of how they work in order to increase comfort levels. Then, they should share an action plan of how to actually buy an annuity. 

Finsum: Most retirees acknowledge the benefits of owning an annuity and self-report a desire to invest in one. Yet only 12% of retirees own an annuity despite the benefits. Some research on this gap came up with some interesting findings. 

Cerulli Associates is forecasting that total assets under management in separately managed accounts (SMAs) will exceed $2 trillion in assets this year. 2023 saw asset growth of 12%, and the firm sees a 15% increase this year. It identifies growth in standalone SMAs in addition to unified managed accounts (UMAs) as key drivers of this trend.   

According to Scott Smith, the director of advice relationships at Cerulli, SMAs allow for more customization of portfolios to achieve specific aims such as tax management or value-aligned investing. He also acknowledges that technology has made SMAs accessible and practical for a much wider swathe of the investing universe. 

Previously, an SMA would be too complicated and costly due to tax and regulatory requirements to make sense for smaller accounts. A decade ago, SMAs were only available for clients with millions to invest. Now, they are available to clients with minimums of $100,000 in some cases. 

The growth of these accounts comes at the expense of traditional brokerages. A key difference is that advisors who use SMAs receive compensation from clients’ portfolio values rather than trading commissions which can create bad incentives. 

Finsum: Separately managed accounts are forecast to exceed $2 trillion in client assets this year. These are typically fee-based and allow for more personalization than investing through a brokerage where revenue is generated through trading commissions.