In an article for CNNBusiness, Nicole Goodkind discussed some reasons why the ESG trend may have peaked and examines if it this is a positive development. 

In Q1, total assets under management of ESG funds declined by $163 billion. And, this trend has continued in Q2. This is despite ESG funds modestly outperforming the broader market. 

A major factor is that inflows into energy stocks picked up following the war between Russia and Ukraine. Another is that ESG investing is becoming a political issue with many conservative states looking to ban use of ESG considerations in investment decisions by state-run funds. 

According to Robert Jenkins, the head of global research at Lipper, ESG investing as a seperate entity will likely be phased out. Instead, ESG ratings will simply be another metric to evaluate investments. 

He sees ESG investing evolving into a more mature phase. This phase will be less hype-driven and politically contentious. Instead, the focus will be on standardazing data and ratings so that investors can make better decisions. Overall, it could certainly be positive as it would dissuade companies from ‘greenwashing’ to game ESG ratings, while still allowing investors to include these factors in their decision-making process. 

Finsum: ESG investing may have peaked in terms of popularity especially as it’s become a political target. However, the trend may be moving into a more mature phase.

In an article for ETFTrends, James Comtois laid out the 2 major benefits provided by direct indexing as opposed to investing in index funds. Until recently, direct indexing was only available to ultra high net worth investors. Now, it’s increasingly available to a wider swathe of investors.

Direct indexing allows investors to gain the benefits of index investing such as low costs and diversification but allows for greater customization and reduction of taxes. With direct indexing, tax losses are harvested on an interim basis and can be used to offset gains.

According to Morningstar, about $260 billion has moved into the category as of the end of 2022. And, this trend is only expected to strengthen in 2023. 

According to Morningstar, “Investing directly in the underlying stocks of an index in lieu of a mutual fund or ETF tracking the same benchmark allows for individually tailored tax management.” Another factor cited is that it allows investors to modify indexes based on their specific values to account for environmental, social, or governance factors. Additionally, investors can prioritize any specific factor they want to emphasize such as value or growth. 

Finsum: Direct indexing has seen massive growth over the last couple of years as it’s become increasingly available to a wider clientele. Two major benefits are a lower tax bill and increased customization. 

Jonathan Brasse discussed a recent white paper from Swiss alternatives group, Partners Group, about why private markets are poised to grow faster than public ones over the next decade in an article for PEREnews.

In essence, Partners Group notes the changing landscape for private markets, and how they are playing a larger role in financing the ‘real economy’. Since 2016, funding on private markets has exceeded that of public markets. Last year, about $400 billion was raised on public markets, while more than $1 trillion was raised in private markets.

Another change is that companies raising on private markets are generally healthier and more profitable than ones listing on public exchanges. These trends are also evident in the real estate market.

Fundraising for real estate in private markets has been steadily growing, while the number of real estate IPOs has dwindled. In terms of future returns, real estate listed on private markets has a better chance to be renewed, repurposed, and transformed, while such expenditures are less common on the public side given the pressures of quarterly earnings and shorter time horizons of public investors. 

Finsum: Private markets have been overtaking public markets in terms of funding. This trend is also happening in real estate markets.

In an article for InvestmentNews, Jeff Benjamin reported on Morningstar’s decision to allow competing model portfolios from other asset managers on its proprietary platform for wealth advisors. 

So far, model portfolios from BlackRock, T. Rowe Price and Clark Capital are being introduced to the platform which was launched a year ago. In a statement, Morningstar Wealth president Daniel Needham noted, “This is an important milestone in the strategic evolution of the U.S. Wealth platform.” 

It’s expected that model portfolios from other asset managers like Fidelity will also be added over the coming weeks. Morningstar sees the addition of more model portfolios as a way to help advisors scale their businesses given the decline in the number of advisors, while the demand for advice continues to increase. 

The company believes that advisors need to outsource portfolio management in order to better serve clients. Additionally, asset managers operating model portfolios have significantly more resources than advisors. 

Surveys show that advisors spend about 18% of their time on managing investments. However, investment performance is not the biggest factor when it comes to client retention. Therefore, integrating model portfolios into their practices can lead to more success for advisors. 

Finsum: Morningstar is introducing model portfolios from asset managers onto its platform. It sees model portfolios as important tools to help advisors grow their practices.

In an article for Oilprice.com, Alex Kimani discussed three reasons why Goldman Sachs is bullish on the energy sector. The bank sees Brent and WTI crude oil trending higher to $100 and $95 per barrel over the next 12 months, respectively. 

The bank sees faster growth in China as supportive of commodity demand overall. Regarding energy, it sees supply pressures from OPEC+ production cuts, embargoes on Russian crude shipments and global growth as key drivers.

Some other reasons cited for favoring energy are attractive valuations. Currently, it has a P/E ratio of 6.7 which is the cheapest among the 11 major sectors, and this is considerably cheaper than the S&P 500’s P/E of 22. 

Despite a slowing economy and lower energy prices, Q1 earnings have remained quite strong. Net margins improved from 11.8% to 10.4%. This is in contrast to most sectors which are experiencing margin compression. Further, earnings are forecast to remain stable over the next couple of years due to low capex, higher costs for new projects, and geopolitical risk. 

Overall, energy stocks offer investors attractive valuations and robust earnings growth potential. The longer-term picture remains attractive due to longer-term supply trends, while demand is expected to remain steady.

According to Russell Investments, the outlook for active fixed income looks quite attractive in 2023. They see opportunities to outperform benchmarks due to market and trading inefficiencies, index construction, and a volatile macro environment due to the lack of clarity around the Fed’s hiking schedule.

Compared to active equity funds, they see more opportunity for alpha in active fixed income for a variety of reasons. A major one is that fixed income indices are constructed with thousands of securities, often with different durations, coupons, and covenants. For astute managers, this can create opportunities to uncover value especially amid rating changes, new issues, and rebalancing by indexes. 

Another favorable factor is that many participants in the fixed income market are not focused on maximizing returns. Instead, there are forced buyers of fixed income due to capital requirements like insurance companies and banks. Further, central banks remain active in these markets as well, and they telegraph their intentions well in advance. 

Finally, there are simply more inefficiencies in fixed income as the vast bulk continue to be traded over-the-counter which leads to less price transparency and wider bid-ask spreads. 

Finsum: Russell Investments sees opportunity for investors in active fixed income funds due to more inefficiencies, less transparency, and more opportunities to uncover value..

Be a pal, huh, and give it a little elbow room. Fueled by institutions and financial advisors intent on seeking to tailor traditional indexes to meet the preferences of beneficiaries, direct indexing’s growing – and quickly – according to al-cio.com.

While direct indexing isn’t exactly new to the rodeo, its use has been spurred by current day computing power, according to a report by Jason Kephart, Morningstar’s director of multi-asset ratings, and his team.

Now, keep in mind, it’s not only your clients with the greatest wealth and complex investment portfolios who should be riding the direct indexing bandwagon, according to Randy Bullard, global head of wealth at Charles River Development, reported investmentnews.com.

“I think every financial advisor should be accessing direct indexing for their taxable client accounts,” Bullard said at the recent ETF Exchange conference in Miami.

“A direct indexing solution is uniquely designed to catch money in transition, and it’s suitable for all types of investors,” he said. “That’s the transition the industry is starting to go through. Once you conquer the operational complexities of direct indexing, it becomes a broad market solution.”

Last year, transitions among financial advisors lost a little ground, according to Investnews.com, reported linkedin.com.

But, tada, independent broker-dealers picked up almost 1,000 advisors in 2023.

The morale of the story? The volume of transitions is secondary; in the world of recruitment, what reigns supreme is lassoing top producers capable of expanding the business.

Up to date technology’s one way snag advisors.

One word to capture technology’s role in drawing fresh talent: “significant,” according to Jim Frawley, CEO and founder of Bellwether.

“Good technology is a game changer and committing to the tech of the future will be very attractive to those being recruited,” said Frawley. “This includes adopting certain aspects of AI and automation and at least being open to investigating other opportunities to free up time and elevate them. Advisors today are looking at tech to make their offering more attractive and substantial. Tech is also becoming their biggest competitor.”

And you might say recruiting pays off.

For example, leveraging its organic recruiting initiatives, during this year’s first quarter, Cetera Financial Group layered on nearly $3 billion in assets under administration, according to thinkadvisor.com.

In a recent Bloomberg article, Katherine Greenfield discussed the growing popularity of triple-leveraged bond ETFs. It’s somewhat surprising given that the bond market is coming off its most volatile year in 2022 in decades given the challenges posed by rising rates and sky-high inflation. 

Further, bond investors tend to be more conservative and favor the asset class, because it is less volatile than equities. Similarly, there has been an uptick on call and put buying on fixed income ETFs as well. To compare, there were 827,000 contracts traded on the iShares 20+Year Treasury Bond ETF in 2013, while there have been more than 2.2 million contracts traded on the same ETF this year.  

Overall, there are 15 leveraged fixed income ETFs, listed in the US. Total assets have climbed to $3.5 billion with the largest being the 20-Year Treasury Bull 3x which provides exposure to longer-term Treasuries and uses derivatives to track its underlying index. So far, this ETF has already seen $720 million in inflows, nearly eclipsing last year’s total of $783 million. According to Greenfield, the inflows into leveraged fixed income ETFs are likely due to retail traders, while the spike in options activity can be attributed to institutional investors.

Finsum: Leveraged fixed income ETFs are experiencing massive inflows, while options activity on fixed income ETFs is also soaring. . 

According to research from the Indiana University Kelley School of Business, the current strength in real estate may prove to be transitory. Currently, the housing market has remained resilient despite higher rates due to a demographic bulge and low inventory of available homes. 

However, Indiana University’s research indicates that demographic-driven demand is at a peak. Coupled with low supply, this is likely to drive prices higher in the near-term. However, there is likely to be long-term slowing in demand due to slower population growth and an aging population, barring an unforeseen surge in immigration or household formation.

Additionally, baby boomers are likely to start downsizing, while lower fertility rates also mean that demand for housing will be structurally less. Due to the pandemic and increase in remote work, there was a surge in household formation that exceeded population growth over the last couple of years. This trend is also unsustainable given demographic realities. 

The rise in mortgage rates has also artificially constrained supply as many would-be sellers are not selling due to locking in low rates. Yet, this is simply ‘pent-up’ supply that will be released into the market once rates decline or through the passage of time. 

Finsum: Real estate has continued to hold up well despite deceleration in economic growth and higher rates. However, this state of affairs looks unsustainable in the longer-term.