Eq: Tech
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.
Companies Newfound Research and Simplify Asset management are partnering on a selection of new model portfolios that are giving investors more options on their equity holdings. The structured alpha portfolios are designed to target different growth offerings and provide different risk exposure. With the four portfolios coming in 20/80, 40/60, 60/40, and 80/20 equity allocations investors will have exposure to equity, rate, and volatility markets to mitigate financial risk. Fund advisors are trying to get outperformance from strategic capital efficiency rather than trying to pick winning stocks at the right time.
FINSUM: Even basic equity/bond allocation strategies in model portfolios are a good way for advisors to drill down the risk in a portfolio.
Exchange-traded funds focusing on environmental, social and governance themes have been one of the fastest-growing market segments in a couple of years, but so far have yet to reach the acceleration in Asia as they have in the U.S. and EU, until now. The most recent data from the Asian Pacific has more than 1.5x as many funds starting in the first half of 2021 than all of 2020. The asset flows are even more staggering. Inflows since in the first half of 2021 are 10x larger than all of 2016, and they have almost already reached 2020’s $2bn. The standout countries are Australie, China, and Taiwan which comprise over 85% of all the ESG ETF assets. Moreover, these trends are expected to continue with more advantages on transparency and liquidity than other market segments.
FINSUM: These are astounding numbers for ESG growth, and faster-growing economies might not have the incoming restrictions to ESG the US could be facing.
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AQR is one of the leading quant funds, and they had a difficult 2021, but they are bouncing back big with a new idea in ESG. Their new Sustainable Long-Short Equity Carbon Aware Fund will pick U.S. and foreign equity on a variety of ESG criteria with a net-zero carbon emissions target, but it will also short funds that aren’t meeting ESG standards. Most funds have stayed only on the positive end of things but CEO Cliff Asness believes shorts selling is a key tool that can be leveraged to reduce carbon emissions. Asness will be a portfolio manager on the funds, and his unique perspective on ESG will be critical in how the fund performs in the upcoming years.
FINSUM: Value quant funds like ESG suffered the last two years relative to the market but so far in 2021 AQR has seen huge inflows and its ESG strategy is part of that.
Word had spread weeks ago that Franklin was in a position to acquire O’Shaughnessy Asset Management (OSAM), but that deal has finalized this week. OSAM will be a bolster an already growing separately managed accounts segment which stands at $130 billion AUM already. However, the big headline is the value-based investing and custom indexing that OSAM provides. The custom indexing platform OSAM owns known as Canvas has grown rapidly and doubled its aum in the last year hitting $2 billion.
FINSUM: This is another headliner deal in direct-indexing. What’s most notable is that many of the deals are coming through acquisitions rather than newer ones originating within the firms themselves.
ARK Innovation is one of the leading model portfolios and has become a household name in the last year, but it looks like the bubble has finally popped or at least deflated. Huge losses in big holders like Zoom, Teladoc Health, and Roku are down over 30% and the only thing keeping the fund floating has been a stellar Tesla performance. This has many investors worried about the broader market because equity prices are inflated. Furthermore, the gap between large-cap growth stocks and smaller caps is as wide as it has been since 2000. Maybe this means an equity bubble could pop, but it could just mean small caps have more value now than ever.
FINSUM: High P/E ratios should have investors cautious at the very least. If the Fed threatens to huff and puff anymore the whole house could come down!