Economy
The SEC has proposed rule and form amendments that, would require additional disclosures regarding environmental, social, and governance (ESG) investment practices by RIAs, registered investment companies, and business development companies. The SEC also proposed rules to extend the 80% investment policy requirement in Rule 35d-1 under the Investment Company Act to any registered fund with a name that suggests it focuses on ESG factors. These proposed rules are aimed at helping investors navigate the endless array of ESG investing options. There is currently no tailored rule for ESG investing and the proposed rules would require consistent ESG-related disclosures about ESG products and services. Disclosures will include how a firm evaluates ESG factors and or how it achieves its stated ESG objectives. Advisors and funds will now need to take any necessary steps to prepare for these ESG-related disclosure requirements.
Finsum: The SEC proposed regulations on how advisors and funds label their ESG strategies should provide investors with consistent and reliable information on ESG products and services.
Alternative assets are exploding, but when will they become available in defined contribution plans? Diversified investing is one of the first things taught to advisors, but with many asset classes becoming correlated, it becomes tough to truly diversify portfolios. Alternative assets are one solution. They have the potential to hedge volatility, increase portfolio income, and provide that diversification. Research firm Preqin is projecting that global alternatives assets will hit $23.2 trillion by 2026, up from an estimated $13.3 trillion at the end of last year. However, 401K participants can’t access these asset classes, aside from exposure in target-date funds. Some plan fiduciaries are looking to change that and are reviewing DC plan menu options. But they face a series of tailwinds such as low liquidity and high costs, not to mention concerns from the DOL. As organizations such as the Defined Contribution Institutional Investment Association are exploring the issue, it’s not too far-fetched to think it may become a reality at some point.
Finsum: Defined contribution plans such as 401Ks currently only include traditional investment options, but that may change in the future as plan sponsors and organizations look for ways to add alternatives to the menu.
As market volatility continues, investors are flocking to annuities. This could be the biggest year yet for annuity sales. Insurance industry data firm Limra is forecasting annuity sales in the range of $267 billion to $288 billion this year, which would break the record of $265 billion set in 2008, during the financial crisis. Annuities offer investors a way to hedge market volatility, so it would make sense that sales are way up this year. The S&P 500 is down over 20% so far for the year and it's only June. Bonds haven’t been much better as the iShares Core U.S. Aggregate Bond ETF, which tracks the U.S. bond market is down 11.5% year to date. Investors have also been enticed by better payouts amid a rising interest rate environment. These benefits seem to outweigh costly premiums and less liquidity.
Finsum: Annuity sales have been soaring as investors look to hedge market volatility, making them an attractive option for risk-averse investors.
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Active ESG Bond ETFs may be a mouthful, but they are also where the market is headed. Most passive bond ETFs have been left in the dust tracking big indexes and getting killed on rising rates with too much exposure to government bonds. Active bond funds have a wider array of maneuvers, and can act more swiftly in order to keep pace with the market. The case for active equity is more difficult, but in macro environments and when so many investors are moving rapidly into ESG fund managers have an edge at selecting bonds that will outperform. The additional exposure to ESG is a subsector that has outperformed market benchmarks because of the rising demand from a new wave of investors. Additionally fund managers seem to outperform within ESG as well because they have a more discerning eye.
Finsum: There has been a second coming for active ETFs and that will only continue if the Fed has to stomp on the brakes.
Direct indexing is an investment strategy where investors own the underlying components of the index, and is rapidly widening in popularity. The full potential may yet to be unleashed however because the strategy could develop as a way to increase charitable contributions. Custom indexing could be used as a means to increase charitable flexibility by gifting stocks or bonds that couldn’t be traded in a comparable ETF. In addition to giving for charity investors could select stocks or bonds that have exhibited losses in order to offset the taxable amounts. This benefit could be double-sided, because charitable contributions reduce tax burden as well. A financial advisor in conjunction with a CPA could harness the full power of direct indexing to maximize investor alpha.
Finsum: While deciding between cash and equity charitable givings is difficult, direct indexing adds a whole new dimension to charitable giving that could unlock new potential.
Some seasoned stock market investors may be calling to buy the dip, but BlackRock just isn’t there yet. The world’s largest asset manager says that valuations just aren’t there yet and assume that in combination with the Fed tightening cycle and thin profit margins there is too much risk. The confluence of factors among inflation, Ukraine-Russia War, and Fed tightening have sent volatility shockwaves through bond and equity markets in the last couple of months. There are other investors who see it the same way as BlackRock, and want a much more prominent spike in the VIX in order to prompt a buy back. The bearishness isn’t completely pervasive as analysts on average are expecting profits to grow by over 10% across the S&P this year.
Finsum: The Euro area could already be in a recession in large part due to the war, which could drive more value in US assets or trigger a recession stateside.