Direct indexing was a hot topic last year as personalization gained steam. It is expected to continue to gain popularity with investors still dealing with inflation and recessionary concerns. Investors want an investment strategy that not only combats market volatility but also addresses their personal situation. According to a 2021 McKinsey study, consumers don’t just want personalization, they demand it more than ever. Investment advisors are recognizing this and looking for ways to incorporate personalization into their clients’ portfolios. Based on the results of Schwab’s 2022 Independent Advisor Outlook study, more than half the advisors surveyed anticipate clients to expect more personalization of investment portfolios. Millennial investors are leading this trend. While personalized portfolios were historically designed for ultra-high-net-worth investors due to high account minimums, advancements in financial technology have brought these offerings to investors of all means. With personalization, investors can have more control over their holdings matching their specific views. Plus, it might also lead to better investment outcomes. Poor investing behavior such as making decisions based on emotion can lead to poor results. With a personalized portfolio, investors are more likely to stick to their strategy when markets get volatile.

Finsum:As inflation and a potential recession remain on investors’ minds, advisors expect their clients to ask for more personalized portfolios.

While many hedge funds performed poorly last year, there was one strategy that had a big year, macro. According to Investopedia, a global macro hedge fund strategy is defined as a strategy that bases its holdings primarily on the overall economic and political views of various countries or their macroeconomic principles. Macro strategies performed well in last year’s volatile market, leading to strong gains for several funds. For instance, AQR Capital Management’s longest-running strategy had its best year since its inception in 1998, with the fund posting a gain of 43.5% net of fees. In fact, at least a dozen AQR funds saw record performance. AQR’s Absolute Return strategy soared 55% before fees, while the Style Premia Alternative Fund jumped 30.6%. AQR’s global macro strategy also had its best year, with a 42% gain. AGR wasn’t alone in having a strong year. Scott Bessent, who is a former Soros Fund Management investing chief, posted a 30% gain in his macro hedge fund and Chris Rokos’s $15.5 billion Macro Fund surged 51% in 2022, his best-ever gain. However, there was one notable firm that didn't perform well, Bridgewater Associates. Ray Dalio’s firm gave up much of its gains after losing money in October and November.

Finsum: Several macro hedge funds performed well last year, with at least twelve AQR funds achieving record performance.

While leads are the lifeline for any advisor, having a great selling proposition can help put advisors over the top. One advisor, in particular, realized fixed income was becoming a key part of his growth. RBC financial advisor Aaron Howe, who’s known among his colleagues as “the equity guy,” found that getting more involved with fixed income is helping him to develop and strengthen relationships with clients. The timing certainly makes sense as yields on bonds have risen with the Fed pursuing a tighter monetary policy. Howe even leads with fixed income as he talks to prospects. He believes that it’s a “win-win.” His clients are more engaged when they hold bonds from the cities and states in which they live. It has also provided him with more touchpoints with his clients. Howe stated, “People often love buying a school bond because they feel a personal connection to the investment.” Fixed income has also allowed him to take advantage of the market. He stated, “Any opportunity you have with your client to show them you are doing something for them to take advantage of the current situation– whether it’s rebalancing or tax loss selling – that’s what they’ll remember down the road.”

Finsum:A financial advisor was able to grow his practice and get more engagement with clients by getting more involved with fixed income.

Based on the results of a recent Invesco retirement income study, 83% of people with defined contribution savings plans expect it to be their largest source of income during retirement. However, some data is showing retirement portfolios were down as much as 23% last year. When you add in inflation, which is making everyday costs expensive, investors may not be able to rely on their 401k for income this year. That’s why John Faustino, the head of Broadridge’s Fi360, is recommending advisors and their clients consider the use of annuities as guaranteed income solutions in DC plans through Broadridge’s retirement income consortium. The consortium includes leading annuity providers such as Allianz, Nationwide, and TIAA, as well as data and analytics firms that work with advisors, such as Fi360, Cannex, and Fiduciary Insights. In an interview with planadviser, Faustino noted that the consortium recently “published criteria for comparing retirement income solutions contained within what we call our prudent practices, which is a collection of legislation, regulation and case law.” He also mentioned that they’re launching a software tool based on this methodology later in the year. The criteria are “designed to help advisers document their reasoning for selecting a particular retirement income solution for a plan and to help them monitor their selections and the overall process.”

Finsum:Broadridge’s retirement income consortium, made up of annuity providers and data firms, published criteria for comparing retirement income solutions such as annuities.

Much has been talked about regarding the failure of the 60/40 portfolio last year, but Vanguard analysts recently suggested that investors shouldn’t abandon a balanced portfolio strategy. Roger Aliaga-Diaz, portfolio construction head for Vanguard, and his team said in a recent note that “A balanced portfolio still offers the best chance of success.” Aliaga-Diaz noted that while the negative correlation between stocks and bonds broke down last year, “longer term, however, the data support balanced portfolios.” The firm noted that “The policy response to higher and more persistent inflation and the subsequent repricing of risk in global capital markets has led to a dramatic shift in our time-varying asset allocation (TVAA) outlook.” The TVAA looks to harvest the risk premiums for which the Vanguard thinks there is modest return predictability. Based on the firm’s current outlook, Vanguard’s optimal TVAA portfolio “calls for a 50/50 stock and bond split, and favors bonds and emerging markets.” Specifically, Vanguard’s TVAA allocation suggests 30% U.S. stocks, 20% international (divided equally between developed and emerging markets), 22% international bonds, and 27% U.S. fixed income (mostly in U.S. intermediate credit bonds). The firm noted that the interest rate tightening cycle in 2022 raised its expected bond return forecasts by more than the equity sell-off raised expected equity returns.

Finsum:While the 60/40 portfolio failed last year, Vanguard believes a balanced portfolio still offers the best chance of long-term success and recommends a 50/50 stock and bond split.

In a recent interview with ESG Clarity, Morningstar CEO Kunal Kapoor offered his thoughts on direct indexing and how custom features could lead to more people being interested in investing. Kapoor mentioned that while separate accounts were always touted as providing customization, in reality, most separate accounts did not provide much customization. That’s why he is so excited about direct indexing. He stated that, “the cool thing about building a direct index is that at the start, the adviser’s having this conversation with the client, not only about the risk profile, risk tolerance, time horizon – but suddenly the conversation is about preferences.” He believes that these preferences get clients engaged with their advisors. He said, that it can “allow an adviser to really drill into an individual’s preferences in an educated way – really walkthrough for the individual what the pros and cons are of implementing those preferences in a portfolio.” Kapoor also compared direct indexing to passive investing. He believes that while passive investing can be good for most people, it can take the fun out of investing. Direct indexing, on the other hand, has many of the benefits of passive investing, but it brings back the fun of making choices.

Finsum:Morningstar CEO Kunal Kapoor believes that direct indexing creates more engagement between advisors and their clients since it requires them to discuss preferences.

If your clients are invested in Chinese companies and have a preference for ESG, it may be time for a change in their portfolios. It appears sustainability rules in western countries are at odds with what’s happening in China. While Chinese equities offer strong growth potential, their ESG ratings rank lower than western nations and most emerging markets. For instance, Sustainalytics, a sustainable rating agency owned by Morningstar, downgraded three Chinese big-name tech companies on its watchlist in October. The three stocks, Tencent, Weibo, and Baidu, were moved to the category of “non-compliant with UN principles.” In addition, Hong Kong Watch, a UK-based group that researches investment and human rights issues in China, recently said in a report that “many of the biggest asset management, state pension, and sovereign wealth funds were passively invested in companies allegedly involved in the repression of Uyghur Muslims in China’s Xinjiang region.” The report found three major stock indices provided by MSCI included at least 13 companies that “have allegedly used forced labor or have profited from China’s construction of internment camps and surveillance apparatus in Xinjiang.” Another problem is that Chinese companies are less likely to respond to queries from ESG rating agencies.

Finsum:With ESG investing continuing to gain momentum, it appears that many Chinese companies are at odds with ESG due to censorship and repression in China.

After a tough year for fixed income, many bond strategists are expecting 2023 to be a great year for bonds. But where should advisors and investors look to invest? In an interview with Yahoo Finance Live, PIMCO Managing Director and Portfolio Manager Sonali Pier offered her perspective on where the sweet spot will be for bonds this year. She believes that despite potential volatility, “there’s a lot of room now for income-producing assets.” She stated, that “a sweet spot may be those Triple Bs within investment grade, for example, where dollar prices have come down a lot as a result of the interest rates rising as well as credit spreads having widened.” In the interview, she also talked about what areas of the corporate bond market to avoid. Her firm is most concerned with areas where there are “low multiples on businesses, low margins, high cyclicality, where it's very difficult to weather a storm like a recession when you have those types of things against you as well as still inflation as an impact.” She mentioned industries such as retail, autos, and wire lines to avoid that are seeing declines due to a “shift in investor demand as well as disruption from the supply chain.”

Finsum:PIMCO portfolio manager Sonali Pier believes that a sweet spot for bonds this year may be triple Bs within investment grade while avoiding industries such as retail, autos, and wire lines.

Last year was a terrible year for the markets, even for many hedge funds. According to investment data firm Preqin, hedge fund returns were down 6.5% in 2022, the largest drop since the 13% decline in 2008 during the financial crisis. That’s why global hedge fund managers are preparing for persistent inflation by seeking exposure to commodities and bonds that perform well in inflationary environments. A majority of 10 global asset and hedge fund managers that were surveyed by Reuters said commodities are undervalued and should thrive as global inflation stays elevated this year. In addition, they are also seeking inflation-linked bonds to shield against price rises, and exposure to certain corporate credit, as higher rates restore differentiation in company bond spreads. For instance, London-based hedge fund manager, Crispin Odey is betting inflation will remain high. He told Reuters that "Commodities will start to rise again. They've sold off very heavily and are below operating costs in many instances." Danielle Pizzo, chief strategy officer at Schonfeld Strategic Advisors, told Reuters that her firm “Aims to focus more on investment grade and high-yield bonds this year as well as commodities.”

Finsum:Hedge funds, which saw the largest drop in performance last year since the financial crisis, are concerned about persistent inflation and are seeking exposure to commodities and select bonds.

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. 

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