Wealth Management
Financial markets are increasingly complicated these days given the uncertainty regarding inflation, monetary policy, and the economy’s trajectory. For investors, the challenge is heightened as both equities and bonds have become increasingly correlated. In a piece for Pension & Investments, MFS Investment Management shared why active fixed income makes sense in this environment and detailed the firm’s approach.
According to Pilar Gomez-Bravo, the co-CIO of fixed income at MFS, “With this macro backdrop and the uncertainty around central bank policy, alpha generation from active management will be a more important factor for most fixed-income investors going forward.”
With increased volatility, MFS recommends that fixed income investors ensure that they are sufficiently diversified to minimize risk by properly balancing duration and default risks. Its active management strategy is based on collaboration between its investment teams, consistency in its investment process, a focus on generating alpha throughout the cycle, and conviction in taking action when there are dislocations in the market.
Some other elements of the firm’s active fixed income approach is to manage and structure the portfolio to express a broad view and diversity of thought. Each portfolio is stress tested to ensure resilience, while the fixed income team stays connected to the equity team to get a holistic view of the markets and economy.
Finsum: Active fixed income is seeing a substantial increase in inflows given relatively high yields, while there is considerable uncertainty about the economy and monetary policy.
Model portfolios can help many financial advisors save time and focus more energy on their clients. They are based on the research, experience, and work done by asset managers and have been shown to offer better performance with less volatility during periods of market turmoil.
The category is rapidly expanding with 18% growth over the last 5 years and expectations that total assets will exceed $10 trillion over the next 5 years. These offerings can also be customized according to every client’s circumstances.
In terms of the best way to introduce model portfolios to clients, WisdomTree’s research shows that the best results are with smaller and tax-exempt accounts, where there may be less hesitancy when it comes to trying a new approach.
The research also indicates that younger clients who are more open to risk will be quicker to embrace model portfolios. In contrast, clients who are closer to retirement age are less likely to change course. However, more than 50% were willing to use model portfolios if properly explained.
The research also suggests that clients will be more willing to use model portfolios if the experience and credentials of the asset manager are emphasized.
Finsum: Model portfolios offer many benefits to advisors. The primary one is it frees up more time for client service.
Succession planning is increasingly important with the heightened pace of M&A activity and the ‘greying’ of the industry. It can ensure the smooth transfer of clients, assets, and responsibilities when an advisor retires.
The process entails identifying who is best qualified to be your successor, ensuring clients concerns are addressed, and regulations are followed. The goal is to ensure that the business continues operating without interruption while preserving the value of the practice.
In terms of identifying potential successors, it’s important to determine whether there is the right alignment with the firm’s values, vision, and approach towards clients in addition to the proper experience, knowledge, and skills. They must also possess some leadership ability as they will have to make important decisions and lead the firm. Finally, these attributes can be developed through mentoring and guidance.
Another element is maximizing client satisfaction and retention through the process. This can be done by introducing the new advisor to clients well in advance and working in tandem for some period before fully shifting responsibilities. It’s also important to stay in regular communication with all stakeholders during the process including clients, employees, and other partners.
Finsum: Succession planning is increasingly important due to the ‘greying’ of the industry and increase in M&A activity. Here are some important considerations.
More...
The breakout in long-term yields has resulted in bonds turning negative on the year. Bonds could rally if the Fed does cut rates next year as anticipated by the market, but the rally would most likely be contained in the short-duration securities according to Blackrock’s Jeffrey Rosenberg. This would be a change from the long end as typically the best place to hedge against equities.
Rosenberg believes that the combination of higher Treasury supply and quantitative tightening will lead to upward pressure on long-term rates. The yield curve has become historically inverted which means that bonds would rally the hardest at the short end in the event of a rate cut. However, many passive benchmarks are overweight toward intermediate and long-term durations.
It’s also clear that there is a different relationship between stocks and bonds in a high rate, high inflation world. This has meant that fixed income is less effective as a source of diversification. However, this is most true with long-duration bonds. Short-duration bonds continue to work to diversify against equities especially as the Fed is likely to remain vigilant against longer-term inflation expectations rising even if it shifts on policy.
Finsum: Blackrock’s Jeffrey Rosenberg details his outlook for active fixed income. He favors short-duration bonds given elevated volatility and the inverted yield curve.
The era of employee-funded retirement began decades ago with the rise of 401(k) plans. Ever since, employers and service providers have been looking for ways to increase participant savings rates within these plans. Research conducted by Empower sheds light on a key to making this happen.
The study found that "engaged 401(k) plan participants are saving at significantly higher rates than that of unengaged participants, demonstrating that getting people involved in their retirement planning is a key component of driving better outcomes."
One way to engage participants is to provide them with access to in-person advice. Yet, not all plan advisors are equipped to deliver advice to all the participants within the plans they advise. Here's where fiduciary support from the plan's recordkeeper can be invaluable.
While partnering with recordkeepers capable of participant-level advice, plan advisors can selectively choose which participants for whom they are best suited to provide advice. The recordkeeper's advice program is an ideal solution for the remaining participants – usually those with smaller account balances or less complex questions.
Fiduciary services such as participant advice are integral to engaging participants, boosting savings rates, and helping them invest wisely. By partnering with the right recordkeepers, plan advisors can enhance the quality and efficiency of these services, benefiting all involved parties.
Finsum: An Empower study shows that engaged 401(k) plan participants save at a higher rate than unengaged participants underscoring the importance of finding ways to get involved in their retirement planning.
Inflows into fixed income ETFs have continued despite major losses in bonds over the last couple of months. Further, there is no clear indication when the tide will turn given expectations of high supply in the coming months and ambiguity about the economy, inflation, and Fed.
The most liquid and popular bond ETF, the iShares 20+ Treasury ETF (TLT) has had $17.9 billion inflows so far this year. Assets under management have swelled to $41 billion as well. The biggest driver of flows is due to institutions, pension funds, and family offices that have a mandate regarding fixed income exposure.
Another factor driving demand is that yields are at their highest level in 16 years due to the Fed’s rate hikes. A longer-term trend that supports fixed income flows is that many investors and wealth managers are increasingly favoring ETFs over mutual funds due to lower costs and better liquidity.
ETFs could also be better suited for volatile environments given that they can be used to harvest tax losses. Additionally intraday liquidity means that exposures can be shifted more easily to achieve precise targeting.
Finsum: Fixed income ETFs continue to experience healthy flows despite significant volatility.