In a recent article in FT Adviser, Lumin Wealth Investment Manager Elliott Frost wondered how much alpha left is in active fixed income. Frost believes that a fixed income allocation should include a strategic mix of active and passive management. He notes that active fixed-income managers have generally outperformed passive strategies in the fixed-income space due to several reasons. The first is that companies with the most debt typically make up the largest component of a fixed income market index, leaving the portfolio more exposed to unfavorable changes in credit. Another reason is the lack of risk mitigation. Passive managers cannot “dial up or dial down risk.” However, he noted that the alpha generated by active managers has been to some degree, due to a long-term overweight on credit. Frost believes that if we account for a manager’s credit exposure, fees, and other factor exposures such as volatility, there might not be much alpha left. This is why he recommends not putting “all your eggs in one basket” and incorporating a passive fixed index into a portfolio for cheap access to a liquid market.

Finsum: Lumin Wealth’s Elliott Frost wonders if there is much alpha left in active fixed income once a manager’s credit exposure, fees, and volatility are accounted for.

Last week, Charles Schwab announced the upcoming launch of the Schwab Municipal Bond ETF (SCMB). The ETF, which is expected to begin trading on October 12, will trade on the NYSE Arca. SCMB will have an expense ratio of only 0.03%, which will be much lower than comparable funds. The ETF will provide access to the broad U.S. investment grade, tax-exempt bond market. The fund’s goal is to track the total return of the ICE AMT-Free Core U.S. National Municipal Index, which measures the performance of the U.S. AMT-free municipal bond market. SCMB seeks to provide income exempt from federal taxes and is not subject to the federal alternative minimum tax. The ETF will have a high credit quality profile, investing only in investment-grade rated securities. John Sturiale, Head of Product Management and Innovation, Schwab Asset Management, stated, “As bond yields have risen, fixed income investing is more attractive than it has been in years, making this an opportune moment to introduce a new choice for investors seeking a low-cost, straightforward approach to income, diversification and risk management in their portfolios.”

Finsum: Charles Schwab is launching an ultra-low-cost Municipal bond ETF targeting investment-grade securities.

During recent testimony before the Senate Banking Committee, SEC Chair Gary Gensler told senators that the agency needs more resources for exams. He said the exam division’s “work is essential to ensuring strong compliance across the board,” including “work to test for compliance with Regulation Best Interest.” Gensler said the enforcement division “is doing more with less” and “more cases are being litigated and going to trial.” He also stated, “The SEC has tried the same number of cases to verdict in federal courts in FY22 (14) as we did in the prior three fiscal years combined.” For fiscal 2021, Gensler said the SEC received 46,000 tips, complaints, and referrals from the public. This was up from about 16,000 five years earlier. For the exam division, Gensler said the division exceeded the previous year’s numbers by completing more than 3,000 exams and the fiscal 2023 budget request supports an additional 4% increase in full-time examiners.

Finsum: In recent testimony, SEC Chair Gary Gensler asked the Senate for more funding for exams, including compliance with Reg BI.

It seems that during the past couple of years, ESG news has downright owned news cycles, according to mediablog.prnewswire.com.

In the course of that period, certain trends have reared their heads. With that in mind, as Q3 grinds to a conclusion, it appears that companies are fine tuning their messaging in a trio of ways as reflected In press releases PR Newswire received this month.

1. Avoiding the Appearance of Greenwashing

2. More Frequent, Detailed Progress Updates

3. Simplifying ESG

In time, it’s anticipated that there will be a further uptick in disclosures associated with the climate, according to indiacsr.in.

It will be associated with commitments internationally to, among other things, the EU’s proposed Corporate Sustainability Reporting Directive and the International Sustainability Standards Board.

From around the globe, top five ESG updates are:

1. Inflation Reduction Act – the most significant investment turned into law in the US

2. Climate-related shock is a severe financial risk

3. Allocation of the largest – ever corporate sustainability bond

4. New renewable energy goals for the city of Chicago

5. The world’s first 100% hydrogen-powered passenger train

Put it this way: research analysts and model portfolios don’t go hand in hand. Meaning, of course, an analyst can’t provide model services, according to cskruti.com. Nope. None. Nada.

"I have been asked this multiple times by the advisers and my answer has always been “NO!”

In other words: zip.

But why, you might ask. Well, no buy/sell recommendation in a specific security exists, the site continued. While advice on a “portfolio of securities” is covered under Investment Advisers Regulations, that’s not the case under research analyst regulations.

Those existing research analysts dispensing model portfolios must alter the product offering and discontinue offering portfolios. What’s more, when it comes to a specific security where clients can determine the action on a specific security, analysts are able to provide buy/sell recommendations.

Further driving home the point, based on the terms of a settlement order passed by the Securities and Exchange Board of India in May, sebi-registered research analysts are unable to offer either the portfolios or advisory services, according to livemont.com.

It’s expected the settlement will have reverberations on the platform Smallcase. It offers investors curated portfolios and was created by research analysts and investment advisors.

According to a recent report from Cerulli Associates, increased demand from financial advisors had led fund managers to include separately managed account (SMA) strategies into their model portfolios. Matt Apkarian, a senior analyst at Cerulli, told FundFire “Typically, model portfolios tap mutual funds and exchange-traded funds, but large asset managers are now seeing demand for SMAs, given their customization and tax-management capabilities.” According to FundFire, citing data from Cerulli, assets in model portfolios hit $2 trillion through the end of 2021. That was a 22% increase from the prior year. That included assets from home-office model portfolios and portfolios offered by asset managers, but excluded advisor-built model portfolios. Cerulli attributes the rise in assets to home offices directing their advisors to outsource investment management. The firm also believes that home offices will increase their model portfolio capabilities to compete with third-party strategists.

Finsum: SMA strategies are being incorporated into model portfolios as a result of advisor demand for more customization and tax management.

According to Sage Advisory in its recently released fourth annual stewardship report, ETF issuers offered much less manager disclosure and transparency regarding their ESG activities compared to their responses in the previous year’s report. The financial firm said that ETF firms had a “distinct change in tone” and “restrained language” in their responses to the survey. The firm attributes the drop in transparency to pending regulation in Europe and from the SEC that would require issuers to define ESG investments more clearly. Regulators are looking to crack down on firms that government agencies believe are overstating their fund’s ESG credentials, also known as greenwashing. The survey covered seven areas of stewardship such as proxy voting, climate and governance, and had a total of 69 questions. Based on its report, the firm believes that fines and proposed regulations could have both positive and negative consequences. The positive is that greenwashing could become less common, while the negative is that a lack of transparency could become an issue.

Finsum:As a result of pending regulations, ETF firms are becoming less transparent regarding their ESG activities.

Not only did the SEC’s Regulation Best Interest (Reg BI) take effect about two years ago, since then, its had tongues wagging, according to questce.com. The topic continued to flash plenty of energy at FINRA’s recent 2022 Annual Conference.

So, what insights have been gained since Reg Bi was implanted and, to this point, what’s clicked for firms? Have any conflicts been isolated?

A few pieces:

1.) FINRA will be Conducting Deeper Reg BI Exams

FINRA wasted no time acknowledging that, down the road, it will undertake deeper reviews of Reg Bi and Form CRS.

2.) Audits Unveiled Some Good (and Bad) Behaviors

3.) Product Decision Trees Should be Documented

4.) Training/Policies Needs to go Beyond Rule Definitions

Meantime, senators recently were informed by Gary Gensler, chair of the Securities and Exchange Commission, that additional resources are required by the agency, according to thinkadvisor.com. The exam division’s “work is essential to ensuring strong compliance across the board,” including “work to test for compliance with Regulation Best Interest,” he continued.

The enforcement division’s “doing more with less,” Gensler said in testimony before the Senate Banking Committee, the site continued.

The tip line was burning in fiscal 2021, with the agency handling 46,000 tips, complaints and public referrals, the chair added. Five years earlier, that number stood at about 16,000.

A little nip and tuck? 

Well, let’s just say someone hit refresh on ESGs, culminating in the sustainable spend report, which provides an overview of the organization’s ESG performance, according to tealbook.com. How? Details…details, eh? Well, by dispensing detailed reports of spend with ESG certified supplies. 

Emissions reduction, sustainable sourcing, energy management, and animal welfare are among ESG certifications.

Thanks to this feature, TealBook customers with Elite license, make out. That’s because – with no extra effort -- this features lifts spend data capabilities, the site continued. On top of that, customers can filter by time period, take a gander at spend based on ESG category through the report.

The site describes the sustainability spend report as “a powerful new tool that enables customers to make procurement decisions that align with their organization’s policies and business strategies.”

To help define your ESG strategy, goal setting is integral, according to getgoallab.com.

To start establishing its ESG objectives, your company can keep a few steps in mind:

*Understand the value of ESG goal setting

*Assess your ESG baseline before you set your goals

*Familiarize yourself with and set SMART (Specific, Measurable, Achievable, Relevant and Time) goals.

*Measure ESG goals and set timelines by creating KPIs

*Share and announce your ESG goals

Think only a number cruncher can efficiently convert tax losses into assets?

Well, why it might not carry engraved business cards, direct indexing also can turn that trick, according to advisorperspectives.com.

Case in point: with clouds threatening a repeat performance in the portfolios of your clients this year – especially in light of the volatility more than making its presence felt in the financial markets. Sure, with intense inflation, the Ukraine war and supply chain headaches putting a dent in corporate profits, the Fed’s stoking rates at a seemingly breakneck pace. Yeah; yowser. That said, however, the market’s volatility yields an idyllic chance to not only tax loss harvest but also showcase how direct indexing – with room to spare, most effectively experiences the reverberations of tax loss harvesting benefits, the site continues.

Against the backdrop of volatility, of course, with direct indexing, the investors owns the individual securities rather than a comingled fund, according to russellinvestments.com. While losses absorbed on receding stocks belong to them, down the line, those setbacks can be leveraged to offset gains. That can mean a significant boost toward paring down the tax bill of the investor.