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. 

U.S. House of Representatives push back on one of President Biden’s most recent energy initiatives, pausing approvals for liquified-natural-gas exports. The GOPs bill passed on a measure of 224 to 200 in the House and a similar bill making its way to the Senate. 

Biden’s pause on LNG-exports sent shockwaves through the energy markets last month as prices plummeted to the lowest point in nearly four years. 

The halt of LNG exports was praised by climate activists and was seen as a pivotal step by the current administration in dealing with one of the more pressing issues of our times, but conservatives fear this initiative puts a restriction the U.S. ability to generate jobs in this area. Moreover, countries like Russia could step in to fill the void in production. It was only a year ago Biden was pleading with European countries to decrease their reliance on Russian natural gas production. 

The final piece of this puzzle is the legislation would limit the ability of the Department of Energy to regulate and control LNG, and Democrats have made the plea that if this bill was enacted it would increase prices for consumers.

Finsum: Declining natural gas prices could also be affected by this year’s historically warmer temperatures mitigating the need for typical winter consumption. 

Ever since the end of the pandemic, oil demand has seen strong growth and reached new highs. Last year, oil demand increased by 2.3 million barrels per day. According to Bank of America, demand should increase by 600,000 barrels per day on an average annual basis over the next decade. 

Increased demand from emerging markets in Asia and Europe is enough to offset lower demand in developed economies. Over the longer-term, increased use of electric vehicles, more investments in energy efficiency, and greater share of energy production from renewables will impact oil demand. However, there’s still a vigorous debate about the extent and timing.

The International Energy Agency (IEA) sees demand for fossil fuel peaking before the end of the decade. OPEC has strongly disagreed with this prediction and believes that it can be dangerous if it discourages investments in new production especially since oil demand has been so robust following the pandemic despite many skeptics. 

OPEC Secretary General Haitham Al Ghais remarked that “Given these growth trends, it is a challenge to see peak oil demand by the end of the decade, a mere six years away.” He also added that there have been numerous predictions about oil demand peaking in the past which turned out to be incorrect.

Finsum: Oil demand continues to rebound and hit new highs in 2023 at 102.9 million barrels per day. It’s forecast to keep growing over the next few years, although there is a vigorous debate about when it will peak.

Fixed income investors have had to deal with considerable volatility over the past couple of years. The asset class has provided investors with generous yields between but has not lived up to its potential in terms of moderating portfolio volatility and serving as a counterweight to equities. 

In the near term, this volatility is likely to persist especially given uncertainty about the economy and interest rates. Due to these circumstances, fixed income investors should consider actively managed ETFs which are better equipped to navigate these conditions. Active managers are able to optimize holdings and take advantage of opportunities that are unavailable to passive managers. 

Not surprisingly, active bond funds have outperformed since 2022 when interest rate volatility started spiking. Yet, many advisors have been slow to embrace active fixed income ETFs. Some have stuck to actively managed mutual funds instead. According to Capital Group, 80% of assets in fixed income mutual funds are actively managed, while only 12% of assets in fixed income ETFs are actively managed. 

Actively managed ETFs offer advantages such as lower costs, more liquidity, and tax advantages. Capital Group attributes slow adoption to a lack of awareness of the benefits of active fixed income ETFs and limited supply among advisors. To this end, it’s investing in educating advisors about why they should consider actively managed fixed income ETFs over other options. 

Finsum: Active fixed income ETFs have many advantages over passive fixed income ETFs and actively managed fixed income mutual funds especially in the current environment. Yet, adoption has been slow for a few reasons.