FINSUM

FINSUM

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الأحد, 02 حزيران/يونيو 2024 19:44

Institutional Investors Increasing Exposure to Long-Duration Bonds

The first five months of 2024 have featured above-average volatility for fixed income due to inflation continuing to run hot and increased uncertainty about the Fed’s next move. Despite these headwinds, institutional investors have been increasing their allocations to long-duration Treasuries and high-quality, corporate bonds.

One factor is that there is increasing confidence that inflation and the economy will cool in the second half of the year, following a string of soft data. As a result, allocators seem comfortable adding long-duration bonds to lock in yields at these levels. Many seem intent on front-running the rally in fixed income that would be triggered by the prospect of Fed dovishness. According to Gershon Distenfeld of AllianceBernstein, “History shows pretty consistently that yields rally hard starting three to four months before the Fed actually starts cutting.” 

For investors who believe in this thesis, Vanguard has three long-duration bond ETFs. The Vanguard Long-Term Bond ETF is composed of US government, investment-grade corporate, and investment-grade international bonds with maturities greater than 10 years. For those who prefer sticking solely to bonds, the Vanguard Long-Term Treasury ETF tracks the Bloomberg US Long Treasury Bond Index, which is composed of bonds with maturities greater than 10 years old. 

Many allocators are adding duration exposure via high-quality corporates given higher yields vs. Treasuries. These borrowers would also benefit from rate cuts, which would reduce financing costs and boost margins. The Vanguard Long-Term Corporate Bond ETF tracks the Bloomberg US 10+ Year Corporate Bond Index, which is comprised of US investment-grade, fixed-rate debt issued by industrial, financial, and utilities with maturities greater than 10 years. 


Finsum: Interest is starting to pick up in long-duration bonds following softer than expected economic and inflation data, which is leading to more optimism that the Fed will cut rates later this year.

الأحد, 02 حزيران/يونيو 2024 19:43

Value Investing Strategies for the Current Market

Value investing has underperformed over the last 15 years. Flows have followed this performance, with allocators favoring growth strategies. As a result, the number of practitioners of pure value investing has dwindled, especially in the US. Further, many are questioning, whether, it’s still a viable strategy.

There was some optimism that a period of higher interest rates and economic growth would revitalize value stocks especially following the speculative surge of many growth stocks in 2021. However, this turned out to be fleeting as the boom in artificial intelligence (AI) in 2023 sent many growth stocks to new, all-time highs, undoing value’s brief period of outperformance. 

However, the story is much different from an international perspective, where value stocks have been outperforming for a meaningful period. This lends credence to the argument that value’s underperformance is more about the US and technological disruptions than a change in how markets operate. Disruptive technologies like cloud computing and artificial intelligence have allowed a handful of companies in the US to grow to unprecedented scale, which has distorted the growth vs. value dynamic. 

History also shows that markets adapt to these technologies quite rapidly. Over time, margins and profits compress. The long-term benefits of the technology will be realized by the companies that are able to successfully implement the technology to operate more efficiently. 


Finsum: Value investing has underperformed by a significant degree over the past couple of decades. Yet, it’s a different story from an international perspective. 

الأحد, 02 حزيران/يونيو 2024 19:33

Are Fixed Indexed Annuities Better Than Bonds?

Traditionally, fixed income is where financial advisors look to reduce portfolio risk. This is no longer the case in the post-pandemic period, as the bond market has experienced major volatility, which is becoming the norm in a high-rate, high-inflation regime.

Given these conditions, investors may be better off with fixed index annuities (FIAs). Like bonds, FIAs produce income; however, a key difference is that FIAs guarantee an income stream for life as opposed to a fixed period. Another advantage of FIAs is that they have higher earnings potential than bonds, given that many are designed to earn interest based on the performance of an external index like the S&P 500. In contrast, fixed income has significantly underperformed over the last 5 years and failed to beat inflation.

Over long periods of time, costs matter when it comes to long-term investing. Most bond investments have fees that range between 0.5% and 2%. In contrast, FIAs tend to have much lower fees, on average. 

In terms of risk, FIA offers full protection of the principal investment. This means that it can be more effective than fixed income to hedge equities, especially in the current environment. Overall, FIAs can be more effective than fixed income, especially for investors who are in or nearing retirement. 


Finsum: Advisors should consider fixed indexed annuities (FIAs) as an alternative to fixed income, especially in the current environment. FIAs offer lower costs, more downside protection, and greater potential for appreciation.

الأحد, 02 حزيران/يونيو 2024 19:32

How Model Portfolios Can Be a Win-Win

The nature of being a financial advisor has shifted significantly over the past decade. It’s gone from being centered around selecting investments and managing portfolios to financial planning and client service. Model portfolios have been ascending along with this evolution and are forecast to exceed $1 trillion in assets over the next decade.

According to surveys, clients invested in model portfolios are more likely to have higher levels of trust with their financial advisors and believe that volatility is an opportunity to grow assets. Additionally, they are more likely to be interested in other services offered by an advisor. They can also help in terms of aligning the interests of advisors, the firm, and clients. They also free up time and energy for advisors to spend on factors that ultimately drive success for advisors, like client service and prospecting. 

Another benefit is that model portfolios provide an extra layer of due diligence, with 77% of advisors saying that they help with managing risk. In essence, it gives clients access to a higher quality of investment management and a more comprehensive relationship with an advisor.

Models also mean that advisors’ services become more scalable, enabling growth and expansion. In recent years, models have expanded to include offerings from third parties and a wider array strategies, which means there are possibilities for endless customization to fit clients’ unique needs and goals.


Finsum: Model portfolios bring the promise of a win-win for clients and advisors. Clients invested in model portfolios report higher levels of confidence with their advisor and don’t fear volatility. For advisors, they offer the ability to decrease time spent on investment management and focus more on client service and prospecting.

الأحد, 02 حزيران/يونيو 2024 19:30

The Case for Increasing Fixed Income Allocation: Goldman Sachs

According to Lindsay Rosner, the managing director of multi-sector fixed income investments at Goldman Sachs, fixed income is presenting investors with an attractive opportunity to lock in high yields without compromising on quality. There are some challenges given divergences in central bank policy around the world and increasing uncertainty about the timing and direction of the Fed’s next move. Overall, the firm believes that the status quo of ‘higher for longer’ is likely to prevail.

A major factor is inflation, and the economy proving to be more resilient than expected. As a result, the market is now expecting two quarter-point rate cuts before the end of the year, compared to expectations of 150 basis points in cuts entering the year. The next Fed decision is on July 29. Prior to that meeting, there will be considerable amounts of inflation and labor market data, which could impact its thinking, although the current expectation is for it to hold rates steady.

With rates at these levels, there is increased risk that consumer spending is affected or that a higher cost of capital begins to impact corporate profitability and hiring. This risk increases the attractiveness of fixed income, especially as many investors are looking to rebalance given strong equity performance. Rosner sees opportunity in higher-quality areas such as investment-grade corporate bonds and structured products with AAA or AA ratings, especially given an impressive carry differential over Treasuries.


Finsum: Goldman Sachs sees opportunity in higher-quality segments of the fixed-income market. It believes investors should lock in yields at these levels, given the risk that high rates will eventually sour the economic outlook. 

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