2024 has proven to be a much more challenging year for financial markets than 2023. Entering the year, the consensus was that the economy would continue to weaken, inflation would keep trending lower, and the Fed would be proactive and aggressive in cutting rates. 

Clearly, this has not happened. Amid this new paradigm, allocators are understandably looking to make appropriate adjustments to portfolios. Here’s why they should consider increasing exposure to active strategies.  

With fixed income, active investing can allow for precise exposure to a specific theme. For instance, those who don’t believe that inflation will keep trending lower may want to have higher exposure to short-duration debt. Another benefit is that active managers are able to quickly change strategies depending on how events develop, which makes them particularly useful in the current environment. This means that holdings can be optimized for the current environment of ‘higher for longer, but then managers can quickly pivot once the Fed actually starts cutting rates.

Active strategies can also be useful in other asset classes, such as international equities, which currently appeal to many investors due to favorable valuations relative to US equities. With active management, there is more focus on bottom-up, fundamental-focused analysis, which can result in more alpha in less efficient markets. Further, it can also lead to more diversification and risk management than is typically found with passive investing.

Finsum: The first quarter of 2024 has had several unexpected developments. Here’s why allocators should consider active management to navigate this tricky environment. 

Commonwealth Financial Network has forged a strategic alliance with Succession Link, a specialized fintech platform focusing on M&A and succession planning, to revolutionize practice management. Through the integration of Succession Link's bespoke solution, advisors can now seamlessly identify compatible continuity and succession partners. 

The imperative for advisor succession planning is underscored by Cerulli Associates, forecasting the retirement of 100,000 advisors overseeing $10 trillion in client assets within the next decade.

Commonwealth's consolidated platform not only streamlines access to practices for sale but also furnishes advisors with valuation tools, fostering succession planning activity. Succession Link's suite of features, including compatibility scoring and advanced messaging functionalities, aligns with the overarching goal of empowering financial professionals to navigate succession challenges adeptly.

Finsum: Technology tools will be changing the game in advisor recruiting as demographic shifts begin to hit the industry.

iCapital, headquartered in New York and a sizable user base of over 100,000 financial advisors and 560 asset managers, has rolled out its latest offering, the portfolio construction tool, on the iCapital Marketplace. 

Dubbed Architect, this tool equips advisors to delve into alternative assets such as private equity and hedge funds, alongside structured investments, to fine-tune client portfolios. Architect boasts capabilities to simulate past performances, discern macroeconomic influences on portfolio returns, and align future projections with client objectives. 

This initiative aims to bridge the gap between traditional portfolios and alternative investments, historically kept separate. Now accessible to a broader audience, including users via a collaboration with Morningstar, Architect underscores iCapital's commitment to empowering advisors with flexible tools for better client service.

Finsum: Easy access to alternatives in portfolio construction gives clients better access to uncorrelated returns.

2024 has continued 2023’s trend of growth outperforming value. YTD, the iShares S&P 500 Growth ETF (IVW) is up 15%, while the iShares S&P 500 Value ETF (IVE) is up only 6%. For many investors and portfolio managers, this presents an opportunity to increase exposure to high-quality, value stocks. 

NewEdge Wealth CIO Cameron Dawson sees risk with many growth stocks given ‘nosebleed valuations’. However, he believes that there are value stocks with strong balance sheets and cash flow that still have growth potential, specifically in semiconductor supply chain stocks, and older growth stocks that have now matured into value stocks like eBay or Broadcom.

Another approach is to look at ‘unloved sectors’. Examples include utilities, materials, financials, and energy. These have underperformed in the last couple of years amid an environment of higher rates and decelerating global growth. If financial and economic conditions start to improve, then these sectors could enjoy strong rallies. Housing is another interesting area for value investors, given strong fundamentals due to demographic-driven demand and limited supply in addition to attractive valuations. 

According to history, small-cap value stocks tend to outperform during this part of the market cycle. Eric Leve, the CIO of Bailard, sees the next group of AI winners emerging from this category with particular upside in software-as-a-service and cybersecurity stocks. 

Finsum: Value investing is certainly out of favor given the massive outperformance of growth over the last few years. Yet, many investors and portfolio managers see this as an opportunity to increase exposure and de-risk and diversify their portfolios.

Bonds and stocks were higher following the Federal Reserve’s decision to hold interest rates steady. The rally was a result of Fed Chair Powell reaffirming that rate cuts were still on track for later this year. He also added that the ‘policy rate is likely at its peak’. 

The dot-plot also showed that FOMC members are forecasting 3 rate cuts by the end of the year, which is in line with the market’s consensus and a reduction from their previous forecast of 4 rate cuts. Committee members also upped their forecast for GDP growth to 2.1% from 1.4%, while modestly lowering their forecast for the unemployment rate to below 4%. 

According to Fed futures, there is a 75% chance that the first rate cut will be at the June meeting. However, the larger message from Powell is that the Fed can afford to be patient given that the economy remains in a healthy place despite restrictive monetary conditions. 

Another catalyst for equities and fixed income was Powell’s comments on the balance sheet runoff. So far, the Fed has reduced its balance sheet by about $1.4 trillion since June 2022 by letting proceeds from maturing Treasuries and mortgage-backed securities roll off the balance sheet instead of being reinvested. Powell indicated that this round of quantitative tightening was nearing an end and that discussions were ongoing about when it would be ‘appropriate to slow the pace of the runoff fairly soon’.

Finsum: Stocks and bonds were higher following the Fed’s decision to hold rates steady. Two particular catalysts were Chair Powell’s affirmation that the Fed’s next move would be to cut rates and comments about slowing the pace of quantitative tightening.