FINSUM
One of advisors’ main duties is also one of their most challenging: to sift through a seemingly endless universe of funds and pick the ones that will outperform relative to their peers. Even once advisors have identified what they want to buy, they often have dozens of fund options to choose from, all seeming similar without deep research. Luckily, Nasdaq Dorsey Wright has a solution to help advisors choose the highest performing fund, and do so very efficiently. They have a proven methodology that allows advisors to systematically find consistently higher returns for their clients by using Fund Scores.
Nasdaq Dorsey Wright takes many Factors into account when creating fund scores. By using trend-based measures with price and various moving averages, market relative strength measures so as to perform other segments, and a peer metric to select the best funds in the category, Nasdaq Dorsey Wright’s approach has led to consistent outperformance. Every fund has a rating on a scale of 0-6 with 6.0 being the highest possible rating. To analyze the real-world efficacy of fund scores they looked at the historical performance at six different tiers (6.0-5.0, 5.0-4.0, etc.) to see how well they predicted future excess returns. Funds were rebalanced every month to account for changing scores, and there were consistently high returns for the higher rated categories. From 1992 to 2020 the 5.0 and higher had a CAGR of 11.76% whereas the 4-5’s had a 9.06% return. The fund scores were directly correlated with the returns, and even more impressive was how little additional risk was prevalent. Max drawdowns, standard deviations, and Sharpe ratios also all improved across the higher scores.
In summary, Nasdaq Dorsey Wright’s Fund Score is a highly proven, efficient, and easy-to-use tool to find outperformance for your clients.
There are two extremely difficult factors in the bond market currently the Fed is stepping on the pedal as quickly as ever and inflation is taking off to 40-year highs. Both of these put upward pressure on rates which move inversely with bond prices. However, some funds may prove more resilient or even move upward when rates rise. Rate hedge bond funds give investors an option exactly described, but they do come at a cost. One example is LQDH which is an interest hedged corporate fund, which has drastically outperformed its direct compliment, the unhedged LQD. However, these funds are for the extremely risk-averse investors.
Finsum: Rates may be stalling as noted by the recent 10-year dip which is a sign that bond prices might be undervalued currently.
The commodities super cycle is closing or at least halting as many prices such as oil, wheat, and copper have begun to fall. This could be in line with the Fed’s objectives as they have interred the most aggressive tightening in over two decades, but it could be a recession ‘red flag’ similar to the inverted yield curve we have been seeing. Construction and consumption slowing would affect commodities prices, especially those like copper with wide uses, these price declines could be signs of severe contractions in the economic growth. Experts believe this could make a soft landing even less likely if commodities have softened already, however, there is still some bullishness that oil could turn around yet again with Russia and Ukraine still in conflict.
Finsum: If commodities slow, but we continue to get excellent jobs reports like the most recent June report it looks more like the soft landing than a slipping recession.
Recent market volatility has many investors swept up like Dorthy in the Wizard of Oz with no place to turn to, but Direct Indexing could be the ruby red slippers to take you home or at least mitigate some losses. Direct indexing is where investors own the underlying asset of an index, with a core advantage of being able to add/drop individual equities from their holdings. In these highly volatile times when the stock market and particularly subsectors like tech/crypto have taken a beating, investors can drop stocks because of taste or taxes. Rather than being stuck with the whole distribution of gains or losses you can leverage the failure of an asset by selling it off and for tax-loss harvesting. This generates additional alpha that a mutual fund can’t match, and while ETFs are fairly tax-efficient direct indexing is even more so.
Finsum: A small antidote to the volatility could be realizing some losses for those stocks that might not rebound right away.
Model portfolios are becoming widely adopted in the financial services industry. Part of what is driving that adoption is the increasing fintech that supports the industry. For example, Parmenion 30% of which is owned by AssetCo, has been able to advance and grow its abilities under the partial acquisition. They have rapidly expanded their offerings in a way they felt bottled previously. They have poured resources and interest into advised models as part of their platform. The company has made it clear that models will be a growing part of their business moving forward. Their experience and track record will be the primary advantages as new competitors enter the industry.
Finsum: Weather its ESG, models, or custom indexing leveraging fintech platforms has reaped huge gains for traditional financial firms the last couple of years.
Fixed income ETF inflows have faltered over the last year, and new survey data could explain exactly why that has happened. According to the Global ETF Survey in 2022, nearly a third had absolutely no bond ETF exposure. Maybe you would expect investors to hold underlying bonds, but even still this is almost a 10% increase from the prior year's survey. Those surveyed cited a number of reasons as to why the demand has weakened considerably. Primarily it was the macro factors like inflation and rising interest rates which has made investing considerably more risky. However, well over a third of the investors polled said that it was the limited range of options that were available, and almost half said it was two difficult to discern strategy differences.
Finsum: Maybe fixed income needs to simplify the framework if they want to draw in more investors.
Anyone paying attention has seen financial firms, with the acquisition of fintech companies, race to offer direct indexing options at an increasingly low minimum because of technological innovations. Fidelity has lowered the bar once again by announcing that a $1 per stock investment could be the price of the ticket to one of the most coveted asset classes in Wallstreet. Traditionally, DI was exclusive to the ultra-wealthy because it wasn’t feasible to deliver at low minimums, but with the aid of a monthly fee Fidelity Solo FidFolios will be providing opportunities to many more investors. Their model portfolio selection will be core to the construction and offerings to investors as 13 base models will be available. These range from REITs and fintech all the way to AI and robotics.
Finsum: Could this be a world-beating financial marriage between models and direct indexing that paves the path toward accelerated growth?
The closely watched 10-2 Year Treasury Yield curve has inverted which has historically been the gauge of a recession possibility in the post-war era. This comes after the Fed put forth the highest rate hike in several decades (75bps) in response to the runaway inflation that is affecting many Americans. While the inversion was brief it is the best gauge of a recession and many economists are jumping out in front and calling for a recession. However, the hike was enough to calm bond markets' expectations of future inflation as 5-year break-even rates in TIPS spreads signaled 2.63% inflation which is as close to Q3 last year as we have seen since.
Finsum: There is a slight possibility that this won’t signal a recession because there has been so much inflation risk in 10-year yields, as that comes down investors could still expect above-average expectations at the 2-year horizon.
There hadn’t been a shortage of interest in ESG until the economy's most recent swell in volatility which has given investment firms like Goldman pause in their considerations. They have drastically moved up the rejection rate for bonds that satisfy their ESG interest which is now hovering around 30%. Their rejection rate had trended upward as a result of tightening standards, but they are facing additional pressure from buyers who are concerned about greenwashing along with the macro risk present in the economy. They are more incredulous with seemingly glowing reports as people are concerned that companies might not be as green as they appear.
Finsum: Companies not tightening suit on ESG might face some discomfort when regulation inevitably tightens.
Direct indexing is driving many headlines but investors want to know the brass tax: if they are really worth it compared to ETFs. ETFs' advantages over direct indexing are their ease of use and flexibility because they trade like stocks. They tend to have lower fees than a strategy like direct indexing as well, but hiccups happen and an ETF could make a mistake when tracking the underlying asset. Direct indexing investors own the stocks that make up the index, this gives huge advantages when it comes to tax loss harvesting. Moreover, it gives a different level of flexibility by customizing risk exposure. There are two big drawbacks, the first being this is essentially an active management strategy that requires careful attention and rebalancing. Finally, fractional shares can vastly limit your brokerage options.
Finsum: The biggest component appears to be tax-loss harvesting, if you can get enough alpha here direct indexing could prove viable.