All asset managers are adapting to this macro environment in their own ways. In terms of private real estate, funds are taking more time to make investment decisions, exploring new sources of financing, and structuring creative methods to deploy capital. Jenn Elliot covered the cautious behavior among private real estate funds for WealthManagement.

It’s a sharp turn from the last couple of years when funds were much more aggressive in terms of investing and raising capital. Now, raising capital has become much more difficult given that the risk-free rate of return is above 5%. Additionally, rising recession risk, stumbles in the banking system, and stress in commercial real estate have also muddied the picture. 

One silver lining is that many investors have been sidelined which means there is less competition for deals. Thus, private real estate funds have more time to evaluate ideas and can be more selective.

However, the most significant headwind is that a deflationary mindset has become pervasive. Essentially, most investors expect that prices will decline over the next year. In some ways, this becomes a self-fulfilling prophecy. So far, damage has been contained to commercial real estate where there have been a few high-profile defaults and redemption requests. 

Finsum: Private real estate funds are behaving much more cautiously due to higher rates and increasing economic uncertainty.

One reason for the growing popularity of direct indexing is tax-loss harvesting. However, many investors fail to capture the full benefits, because they are manually reviewing their portfolio for these types of opportunities.

In an article for Vettafi’s Direct Indexing Channel, James Comtois shares why automation is essential to unlocking the full benefits of direct indexing. With direct indexing unlike investing in indexes, losing positions can be sold to reduce an investors’ tax liabilities. Then, these proceeds can be reinvested in similar assets. 

However, the more frequently these opportunities can be uncovered, then the greater the potential alpha. Therefore, investors should look to automate this process in order to capture the most benefits. Unfortunately, many advisors continue to do this process on an annual or quarterly basis which means they are missing many opportunities. 

With the right software, these scans can be conducted on a daily or weekly basis, leading to more consistency and better outcomes in terms of tax savings. Automation can also help advisors find the best rebalancing opportunities. Overall, more frequent scans can lead to between 20 and 100 basis points of additional returns. 

Finsum: Direct indexing is rapidly growing, but many advisors fail to capture its full benefits, because they are not automating the process of finding tax-loss harvesting opportunities.

Over the last decade, ESG investing has grown increasingly popular among asset managers as a way to evaluate investments and reward corporations for considering environmental, social, and governance factors when making decisions. 

Like any trend, there has been a backlash as many conservatives believe that corporations should focus on financial metrics. And, there has been a wave of legislation from Republican governors and state legislatures banning the use of ESG factors by asset managers, managing state funds, when making investment decisions.

Given its prevalence in institutions and rising salience as a political issue, it’s interesting to look at recent Gallup polling which shows that the issue has had little impact on most Americans regardless of their political affiliation.

Even though the issue has entered the political arena in the last couple of years, only 38% of Americans are familiar with the term which is unchanged from 2021, the last time that Gallup conducted a poll on the issue.  In addition, 40% of Americans were not aware of ESG at all, while 22% were somewhat familiar with the concept.

Clearly, ESG investing is a big deal for institutions and politicians, it’s failed to break through to the public.

Finsum: ESG investing has grown in prominence among investors and politicians. However, Gallup polling shows that it’s not on the radar of most Americans.

In an article for Financial Planning, Erica Carnevalli discussed some best practices for financial advisors looking to bolster their digital marketing. For advisors looking to market their services especially to younger prospects, having an effective online presence is necessary. 

According to Broadridge Financial Solutions, over 40% of advisors have landed clients through social media marketing but only 28% of advisors have an online marketing strategy. Creating your strategy, targeting your ideal client, and ensuring that it aligns with your firms’ value is the first step.

The second step is to find the channel that aligns with your personality. Some options include podcasts, short form videos, or blogging. The key is to make small investments in terms of time and energy at first. Once, something gains traction, then you can double down on that particular approach. Another key is to stay consistent in terms of your output and timing so that you can be a consistent presence on your prospects’ feed.

Finally, advisors need to curate a professional online image that reflects the best version of you. This means keeping your content professional and curating any comments that could detract or distract from your aim.

Finsum: Digital marketing is increasingly necessary for advisors who are looking to grow their practice. Here are some important considerations.

In a blog post for JPMorgan, Nancy Rooney, the Global Head of Managed Solutions, discusses how many investors have been aggressively buying short-duration fixed income given that yields are at their highest levels in decades and economic risks abound. Some of the most prominent ones include a slowing economy that many believe is likely to tip over into a recession, a standoff between Congressional Republicans and the White House over the debt ceiling, a stressed banking system, and a hawkish Fed.

While this move has paid off so far in 2023, Rooney raises some concerns that it may undermine investors’ efforts to reach their financial goals. Having too much allocation to fixed income and being underexposed to equities will hinder portfolio returns in the long-term. In fact, a portfolio solely in Treasuries would have failed to beat inflation over the last 30 years.  

She recommends that investors think about equities as the growth engine for their portfolios, while Treasuries are more of a cushioning. This means that investors should consider using periods of fixed income outperformance to regularly rebalance their allocations in order to stay on track towards their financial goals. 

Finsum: Fixed income has been a strong performer over the last couple of quarters. Yet, it doesn’t mean that investors should go overboard in increasing exposure to the asset class.

Until the last couple of years, there were limited opportunities for investors to earn a decent income from thier portfolios. Now due to the Fed’s rate hikes, the situation is much different as there are plenty of options for investors. In AdvisorPerspectives, Mike Smith and Mary Erwin of Russell Investments detail some considerations to reduce risk while optimizing for yield. 

During the prior decade when low rates prevailed, many investors were forced to invest in riskier securities in order to generate a decent yield like international bonds, infrastructure bonds, and high-yield bonds. Now, investors can earn similar returns with securities that are much less riskier, but Smith and Erwin believe that investors should continue to have diversified exposure to the asset class given that inflation poses a major threat.

If inflation continues to climb, it reduces the value of these cash flows. Therefore, investors should ensure that their portfolios’ income will grow faster than inflation. Model portfolios can play an important role in this process as it can help build a diversified portfolio and offer exposure to a variety of asset classes with more potential for growth in their income streams.  

Finsum: A major challenge for income investors over the next decade is ensuring that inflation doesn’t eat into their portfolios’ income stream. 

In an article for WealthManagement, Iraklis Kourtidis shared his persepctive on direct indexing and what it precisely means. He says that there are two components to direct indexing. The first is that it helps an investor create a custom and personalized index. The second is that it can help with portfolio management to ensure that it tracks a specific benchmark. 

With direct indexing, investors hold the actual securities themselves in a portfolio rather than an ETF or mutual fund which tracks an index. One advantage of this is that it enables an investor to create their own index. Previously, this wasn’t possible as index investing was only possible through ETFs and mutual funds which follow well-known indexes.

Some investors want the benefits of index investing in terms of diversification and low costs. But, they need greater personalization. One approach is to modify an existing index. Another is to create an index from scratch. 

In terms of portfolio management, there are some additional challenges. For one, index holdings need to be constantly rebalanced especially when tax losses are being harvested to offset gains in other parts of the portfolio or when factor scores change. 

Finsum: There are two parts of direct indexing, and each is crucial for success. One involves constructing a custom index, and the second is portfolio management.

There are considerable headwinds facing the stock market and economy such as a hawkish Fed, uncomfortably high inflation, debt ceiling deadline, an upcoming election year, increasing risk of a recession, a potential regional banking crisis, and geopolitical tensions. 

Yet, the volatility index has trended lower for much of the year and is now at its lowest levels in over a year. Ron Isbitts covered this matter and why it could be an opportunity for ETF investors in an article for ETF.com.

If investors believe that volatility is mispriced, then there are some different volatility ETFs to consider. The ProShares VIX Short-Term Futures ETF offers exposure to volatility over the next 1-2 months. The ProShares VIX Mid-Term Futures ETF holds volatility contracts with a duration of 3 to 6 months. 

There are also ETFs for those with a variant view. The ProShares Short VIX Short-Term Futures ETF moves inversely to volatility, allowing holders to profit from falling volatility. For those who want to generate income from volatility, the Simplify Volatility Premium ETF also tracks volatility but also produces a dividend for holders. 

Note that these ETFs tend to have slippage, high costs, and underperform the S&P 500 over the long-term. Thus, they are best used tactically and with discretion.

Finsum: Volatility is declining despite several potent risks for the market. There are several options for investors to consider.

In an article for ETF.com by Michelle Lodge, she examines whether success in portfolio management is a matter of skill or luck. According to survey results from S&P Dow Jones, there is little connection between good choices made by a manager and portfolio performance. 

According to Craig Lazarra, the Director of Index Investment Strategy at S&P Dow Jones, “Our report for year-end 2022 finds little evidence of persistent active management success, despite considering a variety of metrics and lookback periods.” 

According to the research, investors are better off with low-cost, diversified ETFs. Additionally, success in terms of picking stocks and ETFs is not repeatable. Additionally even in a poor year for passive funds, 51% of active managers still underperformed their benchmarks in 2022. 

Another piece of evidence cited is that managers who outperformed in the first half of the last decade, failed to outperform in the second-half of the decade. The same dynamic appears with active fixed income managers with no indication that success in one year is likely to repeat in subsequent years. 

Finsum: Research shows that active fixed income and equity outperformance is unlikely to repeat in following years.  

2022 was one of the worst years in memory for fixed income amid raging inflation and a hawkish Federal Reserve. Yet, conditions are much more favorable for the asset class in 2023 given a slowing economy and decelerating inflation. In an article for TheStreet’s ETF Focus channel, David Dierking discusses why short-term fixed income ETFs are a compelling option.

While, it’s likely that the Fed is done raising rates for now, the resilient economy and labor market mean that rates are likely to stay ‘higher for longer’. This favors fixed income with shorter maturities as investors can take advantage of high yields.

ALready, we are seeing this manifest as short-term bond ETFs were the recipient of 21% of net bond ETF inflows in Q1, even though they only account for 8% of the fixed income universe by total assets. 

Additionally, many investors treat short-term bond ETFs as a cash equivalent given that they are extremely liquid, while paying generous yields. In fact, Fed policy is essentially encouraging this trade given the extremely inverted yield curve and rally in long-duration fixed income since March of this year. 

Finsum: Short-term fixed income ETFs are seeing major inflows this year and are an intriguing option in the current market environment.