Currently, fixed income investors can lock in yields that are in-line with the average, historical return in equity markets. According to David Leduc, the CEO, Insight Investment North America, this is a major reason we are in a new ‘golden age’ for bonds. 

Another reason to be bullish on the asset class is that most funds are deployed via passive strategies. This has increased liquidity and decreased transaction costs, while also leading to more inefficiencies which astute active managers can capitalize upon. 

Leduc believes that fixed income benchmarks are inherently flawed given that indexes are weighted based on debt issuance. The end result is that passive fixed income investors are overexposed to the most indebted companies.

In contrast, active managers can achieve alpha through careful selection in terms of value, credit quality, and duration. While passive funds invest in a relatively small slice of the fixed income universe, active managers have much more latitude in terms of securities to better optimize portfolios in terms of risk and return. One constraint for active managers is that some strategies are successful but can’t necessarily be scaled. Many err by simply sticking to duration positioning which increases near-term volatility.

Finsum: It’s a golden age for fixed income with bonds offering equity-like returns. Here’s why investors should favor active strategies especially as the risk of a recession grows.  

The most common reasons to choose a tax-deferred annuity are that it allows for accumulation while also ensuring security. Since taxes are delayed till retirement, there is more compounding to augment returns. Upon retirement, the annuity payouts begin. The downside is that these vehicles can underperform during periods when market returns are robust. Additionally, inflation above historical averages would also erode the purchasing power of annuity payouts. 

In contrast to tax-deferred annuities, immediate annuities involve a single lump-sum payment and then payments begin, typically, within a year of purchase. Deferred annuities work differently. After the purchase of the annuity, regular contributions are made. The value of the account grows due to these contributions and earned interest. 

Once the deferred annuity buyer is ready for payments, typically during retirement, the annuity seller begins making payments depending on the terms of the annuity and the total amount of funds accumulated in the account. 

Ordinarily, earned interest is taxed. This is not the case with a tax-deferred annuity. The result is more compounding and principal growth. However, taxes do have to be paid on income received from the annuity or on the accumulated interest, depending on the structure of the specific annuity. 

Finsum: Tax-deferred annuities offer certain advantages such as more accumulation and security. But there are also some disadvantages such as underperformance vs the broader market and inflation eroding the purchasing power of payouts.

Natixis Investment Managers issued its outlook for 2024. It notes that cash levels are higher than normal due to volatility and uncertainty. However, it does believe that some of this cash will be put to work in model portfolios. 

Overall, it sees uncertainty continuing given a tense geopolitical situation in multiple parts of the world, an upcoming presidential election, and the risk that the economy stumbles into a recession. But these conditions are positive for fixed income given attractive yields, falling inflation, a more accommodative Federal Reserve, and equity valuations which are once again getting expensive. 

According to Marina Gross, the head of Natixis Investment Managers Solutions, model portfolios are one of the biggest trends in wealth management. She notes that “Firms are looking to provide a more consistent investment experience for clients in an increasingly complex market, advisors are looking to grow their practices and know clients want more than an allocation plan, and clients are looking for broader more comprehensive relationships with their advisors. Models offer a solution that fits the bill for each in 2024 and beyond.” 

Model portfolios are particularly suited for the current environment as they help manage risk and increase the chance that clients will stick to their financial plan through market turbulence. For advisors, it leads to more confident clients while freeing up time for revenue-generating and business-building efforts.  

Finsum: Natixis is forecasting that model portfolios will continue to gain traction in 2024. Given high levels of uncertainty, model portfolios are particularly useful for advisors and clients. . 

Financial advisors understand that fixed annuities often face a perception hurdle. Their clients envision handing over most of their hard-earned wealth and relinquishing control, sacrificing legacy for guaranteed income. But this all-or-nothing perspective overlooks the nuanced role these annuities can play in a diversified financial plan.

Speaking at a Morningstar conference, Wade D. Pfau, PhD, CFA, RICP®, founder of Retirement Researcher, offered his suggestions to advisors. "The idea of a tradeoff between meeting a spending goal versus not being able to provide a legacy is misguided," he said. "With the conversation around annuities, it's important to remember it's not all or nothing. It's not, 'Do I put everything in the annuity, or do I put everything in investments?'"

Helping clients see fixed annuities as part of a balanced approach is essential. By providing a secure income floor, fixed annuities enable the remaining parts of the portfolio to meet their other financial objectives, such as growth and flexibility.

Building a portfolio need not be a zero-sum game. Fixed annuities don't have to steal the show – they can be valuable supporting actors, providing income stability while the rest of the investments shine in their own respective roles.

Finsum: Retirement expert helps advisors broaden their perspective on how to discuss fixed annuities with their clients.

As the Federal Reserve's battle against inflation unfolded, recessionary fears loomed large over the US economy. However, whispers of a "soft landing" – a scenario where the economy treads water instead of diving into recession – are gaining traction. While the future remains uncertain, this potential reprieve raises critical questions for investors: how will markets react, and could value stocks thrive in this environment?

Drawing from historical patterns, experts point towards a potentially favorable landscape for value stocks. Vanguard's mid-2023 report revealed a compelling trend: since 1979, value stocks have outperformed their growth counterparts during economic recoveries. Kevin DiCiurcio, CFA, head of the Vanguard Capital Markets Model® research team, underscores this historical relationship: "On average, value has outperformed during economic recoveries, historically speaking. So, if you believe that the Federal Reserve may have engineered a soft landing—that we're going to sidestep a recession and that the economy's next move is an acceleration—the case for value is strengthened."

While past performance isn't a guaranteed predictor of future returns, the allure of historical rhyme resonates in uncertain times. If the economy begins to climb out of its current lull, advisors and investors should keep a sharp eye on value stocks.

Finsum: Learn why some experts are revisiting value investing’s historical performance advantage during periods of economic recovery.