Morningstar recently completed its annual review of the US Model Portfolio Landscape. It noted that assets under management (AUM) in model portfolios reached $424 billion, a nearly 50% increase over the last 2 years. 

Some of the drivers of growth include enabling an easier investment process, providing access to institutional investors’ insights, and increased fund selection. It allows advisors to outsource elements of the investment management process to the extent that they feel comfortable. The net benefit is that it allows for more time to be spent on client engagement, financial planning, and growing the business. 

Another factor is lower costs. On average, model portfolios are 19 basis points cheaper than comparable mutual funds. In terms of market share, Blackrock and Capital Group are the leaders with $84 billion and $75 billion, respectively representing 37.5% of total AUM. Launching of new model portfolios has slowed as there is saturation in many areas like income, ESG, passive, or active. Instead, new launches are predicted to focus on greater customization such as optimizing tax efficiency.

Finsum: Model portfolio AUM has risen by nearly 50% over the last two years. Reasons for growth include easing the investment process management process for advisors, lower costs, and a greater variety of options.

Annuity sales reached a record $385 billion last year, up 23% from the previous year, driven by a growing demand for retirement income security amidst rising interest rates. To meet this demand, life insurers are investing in corporate debt and commercial mortgage bonds to fund these products.

Despite recent declines in bond yields, annuity sales are expected to remain strong due to demographic factors and higher interest rates, maintaining tight valuations in the investment-grade corporate bond market. Fixed-rate deferred annuities, especially popular among those nearing retirement, saw their best-ever quarterly sales of $58.5 billion in the fourth quarter of last year, indicating sustained demand among individuals approaching retirement age.

Looking ahead, annuity sales are likely to continue robustly, supporting corporate debt markets and providing stability to investment-grade corporate bonds and commercial mortgage-backed securities. This trend underscores the enduring appeal of annuities as a favored choice for individuals seeking guaranteed income in retirement and highlights their role in shaping the landscape of financial markets.

Finsum: Expect annuities products to continue to have very high demand for the foreseeable future given the aging U.S. population, and this shows fixed income demand will also increase as a result. 

The rally in bonds since Fed Chair Powell’s pivot at the December FOMC meeting has been fully wiped out following recent economic data and a more hawkish than expected FOMC at the February meeting. 

Over the last month, forecasts for the timing and number of rate cuts in 2024 have been severely curtailed. Entering the year, many were looking for 6 rate cuts with the first one in spring. Now, the consensus forecast is for 3 cuts, starting in July. This is consistent with FOMC members’ dot plot at its last meeting.

The narrative is clearly changing with some chatter that the Fed may not cut at all. Prashant Newnaha, senior rates strategist at TD Securities Inc., noted that “January CPI is a game changer — the narrative that Fed disinflation provided scope for insurance cuts is clearly now on the chopping board. There is now a real risk that price pressures will begin to shift higher. The Fed can’t cut into this. This should provide momentum for further bond declines.”

Given these developments, Amy Xie Patrick, the head of income strategies at Pendal Group, favors corporate credit over Treasuries. She views the strong US economy as providing a tailwind to risky assets, while making Treasuries less attractive. 

Finsum: Bonds have erased their rally following the December FOMC meeting when Chair Powell signaled that rate cuts win 2024. Here are some of the drivers and thoughts from strategists.