Eq: Total Market
Last year, active was the operative word, as passive management stared into the taillights of fixed income active managers, according to bsdinvesting.com.
In the midst of the Fed’s policy change and a rejuiced market, active management improved markedly in the second half of the year. Over the last two quarters, an average of 60% of active managers outdid passive management.
Meantime, in January, while Vanguard noted that additional volatility appeared to be in the cards this year, for active management, it foresaw a bigger opportunity for it to strut its stuff.
The decisions of active sector and security selection should carry a bigger stick in a market holding its own against macroeconomic forces or taking a back seat to central banks.
Across most segments, appealing yields are attainable, including some of the best value in higher quality bonds. Even in the face of watered down economic conditions, it should hold its own.
Hey, naysayers – and don’t pretend you’re not paying attention -- on the heels of negative returns last year, in 2023, potentially, fixed income asset classes will come up with an improved total return performance, according to etftrends.com
In October and November, as risk markets hit the comeback trail in conjunction with indications that inflation was receding, positive momentum found its mojo. Those strides opened the gates for investors to sniff outside of interest rates that hit nosebleed levels -- even though market volatility probably isn’t headed for the door. That’s because the U.S. economy continues to pose challenges.
Given the Fed took actions that seduced rate hikes during 2022, U.S. Treasuries have up ticked big time. Consequently, the site stated, investors should contemplate a greater allocation of assets to the asset class.
Meantime, through passive investment strategies, investors still will be exposed to broad market beta, a trifecta these days of burgeoning inflation and interest rates along with greater dispersion across fixed income sectors and regions is the motherlode for skilled active management, according t0 wellington.com.
According to analysts, advisors are preparing for investor backlash regarding ESG investing amid divestments from red states. Several states such as Kentucky, Florida, Missouri, and Texas have threatened to pull pension funds from companies that boycott energy companies. In addition, anti-ESG firm Strive Asset Management recently launched a “financial educational campaign” aimed at encouraging investors to press advisors on ESG issues. Michele Giuditta, director of Cerulli Associates noted that during a 2022 poll, 46% of financial advisors cited the perception that ESG investing is politically motivated as a “significant deterrent to ESG adoption,” compared to just 16% in 2021. However, two-thirds of advisors say they consider ESG factors for at least a portion of their client accounts. Giuditta added, “Advisors will need to discuss the merits of ESG and sustainable investing with their clients and reinforce how and why asset managers are using relevant ESG data to drive long-term economic value.” Craig Kilgallen, relationship manager at Fuse Research, told Ignites that while state bans can discourage institutions from investing with an asset manager, the same may not be true for retail investors. He added, “As it relates to the intermediary world, I’ve anecdotally heard that firms are not changing the way ESG is discussed.”
Finsum:While state bans on ESG-focused managers may discourage institutions from investing with an asset manager,it won’t stop advisors from considering ESG for their clients.
While many model portfolios produced lackluster returns last year, there is one type of model that was able to limit losses, the bucket strategy. First developed by wealth manager Harold Evensky in 1985, the bucket strategy is a “now versus later” approach by dividing investors’ retirement savings into two segments. The first was a cash bucket to meet five years of living expenses and the second was an investment bucket for longer-term growth. Essentially the bucket strategy separates assets according to when they are going to be spent. The cash cushion was for the early years of retirement, while the growth segment was for maximizing the rest of the portfolio over a longer period. Morningstar’s Christine Benz created her own bucket portfolios which included those composed of only mutual funds and those that only included ETFs. Her three mutual fund bucket portfolios, which range from aggressive to conservative, only saw losses of 7.65% to 10.21% last year, compared with the S&P 500’s loss of 18.11%. This shows the advantages of a bucket strategy in market downturns as the downside protection from cash was able to buffer losses. Benz’s models also included allocations to short-term bonds and dividend-oriented stocks, which outperformed other bond and equity strategies.
Finsum:Morningstar’s bucket portfolios outperformed the S&P 500 last year by a wide margin due to cash buffers and exposure to short-term bonds and dividend stocks.
A recent survey found that investors are concerned about their retirement prospects and it’s easy to understand why. A combination of volatility, inflation, and recessionary fears is driving investors to check their retirement balances multiple times a week. Clients are certainly also voicing their concerns to their advisors. With both the equity and the fixed income markets seeing steep declines, there haven't been many places to hide unless an advisor has been employing some type of Relative Strength strategy. By focusing on Relative Strength, also known as momentum, an advisor can remove emotion and subjectivity from their investment process and potentially see higher returns for their clients even in market environments such as this.
For over 30 years, Nasdaq Dorsey Wright has created many innovative technical indicators based on momentum using Point and Figure charting. One of the most popular is the “Technical Attribute” rating. Their research has shown that a high attribute portfolio, which includes ratings of 3-5, has a strong propensity to outperform, with the largest outperformance reserved for the highest ratings. The technical attribute ratings are composed of five distinct Point and Figure chart attributes, including four relative attributes (two vs. the market and two vs. the sector), and one absolute attribute (trend). The absolute attribute is typically useful in limiting the downside, as a purely relative approach can leave a client exposed when everything is moving down at the same time. In a year, when only one sector (Energy) has a positive year-to-date price return, employing the “Technical Attribute” rating can help advisors make their clients feel more comfortable about their retirement prospects.
Self-directed everyday investors (as well as advisors) are getting access to some pretty powerful tools. Listen to Jack Swift discuss how TIFIN uses AI to identify signals to improve the whole experience.