Many investors have become accustomed to the rising equity prices that have been pumped up by an ultra-low rate environment and are overexposed to too much risk, at least that's the opinion of 4/5ths of investment professionals surveyed by Natixis Investment managers. Over 3/4rs of professionals surveyed said that inflation and interest rates were the biggest risks to portfolios moving forward. The way out of that risk exposure is to have more active management which can thrive when the risks are apparent. The other solution is model portfolios which have been built to target specific risks like inflation or interest rate risk. Finally, advisors are being begged to add crypto to portfolios in a high weight, and are unsure of how this fits into portfolios.
Finsum: Regular volatility or supply-side shocks are almost impossible to predict, but when the risks are very apparent investors should take the necessary precautions.
Direct indexing is in its infancy in UK and Euro area, whereas across the pond it has taken off quickly. Driving the growth in the U.S. is the ability for direct and custom indexing to accommodate the US tax system and those benefits just aren’t present in Europe. However, ESG is a well-developed market and direct indexing is turning the heads of many ESG investors for its custom approach. Experts say the institutional knowledge in Europe could make it a haven for direct indexing because larger ETFs take too simple of an approach. Morgan Stanley’s Paramterics sees a natural marriage of these industries because experts can develop more robust indices or individual investors can drop the greenwashers from the indices they are tracking.
Finsum: ESG could vault direct indexing to the investing frontier in the way that tax-loss harvesting has in the U.S.
Technology stocks ticked up late this week which was refreshing as they have suffered since November when the Nasdaq crept to an all-time high. Rising bond yields fueled the devaluation in technology stocks because as the yield curve steepened this lowers the relative value of future cash flows which are the foundation of growth stocks. Additionally higher inflation also devalues those future earnings. However, the yield curve stagnating was enough to boost the Nasdaq by 3%. Additionally, most tech companies have surpassed expectations on earnings despite headline numbers from Meta.
Finsum: It might not take too many rate hikes to put inflation back in its place which means tech could be undervalued!
ESG ETFs continue a fire streak and every single Wallstreet mainstay is launching funds as fast as they can. Goldman launched their latest fund this week Goldman Sachs Bloomberg Clean Energy Equity ETF which will be traded with the ticker GCLN. It will hopefully capitalize on the US transition to clean energy with a strong focus on equities. ESG has a strong track record as last year 13 ESG index funds with large caps crushed the S&P 500 with an almost 30% return. Goldman thinks the ESG movement is just in its infancy and this fund is a long-term strategy.
Finsum: The rapid growth in ESG funds is starting to teeter on bubble territory, but that bubble could pop a long time from now.
2021 was, without a doubt, the year of ESG Investing, but 2022 could shape up much differently as the SEC is turning its attention to ESG. There has been a wide amount of attention being given ‘greenwashing’ where companies get favorable ESG ratings despite subpar ESG performance. This is an area the SEC is warning investors about; conflicts of interest could incentivize better scores than are necessarily deserving. These issues were core to the 2008 financial crisis and are at play once again. Also, the SEC is concerned that the following ESG factors may cause a divergence from traditional methods which coil weaken the overall financial system.
FINSUM: A crackdown by the SEC might be enough to spoil the ESG party and could reveal it as the next financial bubble.
Model Portfolios got some widespread skepticism thrown their direction when a group of academics wrote a paper criticizing their usage. The points centered around conflicts of interests and the fee structure. However, model portfolios are templates for investing and so their optimization might not be the ‘perfect’ formula for everyone. Additionally, of course funds are going to include their own products in model portfolios (even if they have higher fees), because they believe their products are superior. In fact, funds would be violating their fiduciary duty if they didn’t honestly think their own ETF was a better product at a slightly higher fee structure.
FINSUM: Cherry picking better-performing portfolios after the fact is an unfair advantage; many model portfolios have different risk factors.