Alternative investments can add value to portfolios by boosting returns and leading to increased diversification according to a recent UBS white paper on the subject. Within the category, it favors specialist credit hedge funds, macro hedge funds, secondaries in private equity, and specific types of private debt. However, it does note that investors should be aware that there is a tradeoff in terms of reduced liquidity. 

The firm recommends a 20% allocation and believes that it could lead to an annual increase of 50 basis points in the long term. It’s increasingly of interest given the asset class’s strong performance in 2022 when stocks and bonds both delivered double-digit, negative returns. In contrast, most diversified alternatives’ indices saw performance between -6% and +17%. In terms of forward returns, the bank forecasts return between 6% and 11% over a full business cycle.

In terms of specific strategies, UBS recommends specialist credit hedge funds which focus on differences between strong and weak companies. It also favors secondaries in private equities and notes some attractive discounts in the space. The bank also sees upside to private debt given that yields are around 12% with lower default risk than high-yield credit. 

Finsum: UBS is bullish on alternative assets. It believes that the asset class can boost returns while also increasing diversification. 

The last FOMC meeting saw the Fed put a pause on hikes. Recent economic data, specifically softer inflation prints, is also supporting the notion that the Fed’s next move will be to cut rather than hike. Adding fuel to the rally was comments from Fed governor Christopher Waller that Fed policy was ‘well-positioned’ to bring inflation back down to its desired level. Waller’s concession is noteworthy given that he has been among the most hawkish FOMC members.

It’s already resulted in longer-term yields dropping, as the 10-year yield has declined from 5% in mid-October to 4.3%. As a result, equities have surged higher, and bonds posted their best monthly performance in nearly 40 years. The Bloomberg US Aggregate Bond Index was up nearly 5% in November. This performance is likely to attract inflows especially as bonds will further strengthen if the economy does fall into a recession. 

With these gains, the asset class is now slightly positive on a YTD basis. Many investors may also be eager to lock in these rates especially as the ‘higher for longer’ narrative around interest rates seems to be passing. There’s also increasing chatter of a rate cut as soon as spring of next year, while the odds of another hike have diminished. 

Finsum: Bonds enjoyed a strong rally in November. Some of the major factors behind this strength were dovish comments from FOMC members, soft inflation data, and the Fed nearing the end of its hiking cycle.

UBS Wealth Management Americas posted a small increase in advisor headcount and added $300 million in new assets during the third quarter. Both are the first gains after two quarters of declines. Last quarter, UBS had outflows of $3.4 billion. 

The unit posted profits of $307 million, which was $231 million less than last year’s Q3. The bank attributed this to lower commissions as more clients shift towards a fee-based planning model. Another factor is that UBS CEO Sergio Ermotti noted that it doesn’t include interest and dividends when calculating asset growth unlike US competitors. In future quarters, the company will be calculating asset growth in this manner. 

In the quarter, advisor headcount increased from 6,071 to 6,142. However, headcount is still down 2% on a year-over-year basis. The company said in part this is due to its recruitment efforts focusing on a small group of high-producing advisors. Ermotti added that the company is resuming growth bonuses for any advisors who add million-dollar clients. 

Overall, US brokers managed $1.76 trillion in client assets which was up 16% compared to last year primarily due to asset price appreciation. UBS’ Americas unit is a laggard relative to other geographies within the company and its US-based competitors when it comes to asset growth. 

Finsum: UBS posted a small increase in net new assets and advisor headcount. The company is focused on boosting asset growth through the recruitment of high-earning brokers. 

Blackrock is the leading company in the $7 trillion ETF market in terms of assets and new issues. According to Dominik Rohe, the head of BlackRock’s Americas ETF and Index Investments business, active ETFs are a category with significant growth potential.

He notes that the boundary between active and passive ETFs is becoming ambiguous as all types of strategies are now being offered with an ETF wrapper. This is leading to more complex and innovative offerings. In 2023, the firm launched 18 active ETFs with more planned for 2024. According to Rohe, active ETFs currently make up 38% of all US-based ETFs with a total of $101 billion in assets under management. And, they are changing the concept of what an ETF can be from a passive vehicle to a ‘technology that will generate active return’ for investors. To that end, it’s launched active ETFs for alpha, specific goals, and strategies.

Another boost for active ETFs is due to the increase in fee-based financial planning and fiduciary wealth management which is leading to the ascendance of model portfolios. These are typically constructed with ETFs with the category growing at a 15% annual rate. Blackrock is forecasting that total assets in model portfolios will exceed $10 trillion by 2027, more than doubling its current level of $4.5 trillion, leading to more demand for these types of products. 

Finsum: Blackrock had an eventful 2023 with a bevy of active ETF launches. It sees continued growth for the category with the continued adoption of model portfolios as a key factor.

In an unexpected twist, crude oil prices declined following the OPEC meeting which ended with an announcement that there would be more production cuts in Q1 of next year. Following the Thursday meeting, oil prices fell by more than $2 and this weakness continued into Monday’s session. Since late September, WTI crude oil has dropped from the low $90s to the low $70s. 

The bearish reaction is likely due to the market already expecting that some sort of cuts would be announced. Further, these cuts are of a voluntary nature. Many are skeptical that there will be enough discipline among members especially given that there has been dissension at recent meetings.

In their statement, OPEC announced voluntary cuts totalling 2 million barrels per day. The committee also signaled concerns over weaker demand in 2024. In terms of specifics, Saudi Arabia will cut 1 million barrels per day and another 300,000 of cuts will come from Russia. However, the lack of details is adding to uncertainty over whether these cuts will actually take place especially given that smaller OPEC members have large reliance on oil revenue and tend to be unreliable, when it comes to production discipline. 

Finsum: Crude oil prices declined following last week’s OPEC meeting. This is despite members agreeing on voluntary production cuts.