Active funds are finding themselves in a better position than ever. Outflows are at their lowest levels in over half a decade, inflows are starting to swell, so what is the key to their success? The predominant factor driving them is the wide range of dispersion in the stock market’s performance. Sure, the aggregate performance has been great post-pandemic but the difference between the bottom and top quintiles has been above average for the last year. This gives pickers an advantage over passive funds. They are making their picks by not overreacting to inflation news and doubling down on stocks that benefit from stay-at-home orders and the covid environment. Active funds tend to downplay value-oriented stocks, and the few they are bullish on are bargains in communications companies. Finally, Facebook is the through-line, as nearly two-thirds of active funds hold the largest social network.

FINSUM: This is definitely a ‘pickem’ environment with large dispersion in the S&P 500, and broad index/passive funds will lag active managers.

Chinese regulators have come after everything from internet companies to education platforms, and this has left many investors skittish. Investors that would have maintained their convictions would have been well-suited, as since mid-August Chinese internet companies have bounced. Over this same time frame the MSCI Emerging Market Index, which holds a large share of Chinese companies, has doubled the return in the S&P 500. China’s focus on future regulation will better promote growth moving forward. The structure formed may benefit semiconductor companies, smart manufacturing, alternative energy, machine learning, cloud computing, autonomous vehicles, and other internet-related companies. Finally, Chinese companies have been quick to undue overwrought regulation and long-term regulation will be moderate.

FINSUM: Investors shouldn’t be too fickle with China, don’t spend too much time trying to nail regulatory swells, and embrace the long haul.

Artificial Intelligence is being adopted across the financial industry. In a recent poll by the World Economic Forum, executives at 151 leading financial institutions were asked questions about the prospects of AI in their business. 77% expect AI to be a critical part of their business in the next two years and 64% expect to be mass adopters. Magnifi can bring this cutting-edge technology to your financial institution. Adopters of Magnifi’s products will utilize machine learning techniques that can optimize portfolios for their clients across risk, return, themes, fees, and other factors. AI’s wide adoption is being utilized to lower high labor costs, or even better, to augment current labor for more productivity. Finally, Magnifi delivers all of this with a simple set of tools that are easy for advisors to interact with to deliver their clients the best product possible.

(San Francsico)

There are mixed signals as to how to currently position oneself in the market as news reports are calling many things a good buy, from doubling down on momentum to cyclical value stocks, but Goldman Sachs is bullish on lots of large-cap internet stocks. Amazon, Facebook, Snap, Uber, Lyft, and Expedia all received buy ratings from Goldman’s investment team. They see secular trends in revenue growth and operating efficiencies scaling these companies even larger over the next couple of years. While they don’t consider themselves overly bullish, they see digital advertising being a key lever to push for these companies to have their full upside priced correctly by the wider market. Subscriptions, the creator economy, cloud computing, and augmented reality are all reasons to be fans of large-cap growth, but they are staying away from Airbnb and Twitter. FINSUM: The fed-keeping rates low is very promising for growth companies that are reliant on the credit-frothy economy. But rate moves are also the key risk.

(New York)

A successful 8-month streak has put the market well above expectations, and there are reasons to still be optimistic, but the number of protection plays is growing on Walls Street. Whether it is a slowing economy, rising inflation, spreading delta variant, or tapering tantrum there are lots of reasons to stay protected which is why over $5 billion in inflows are headed to volatility-based protections. Funds like the Simplify Interest Rate Hedge ETF (PFIX) offer a direct hedge against a future of the interest rate market by placing a call on Treasury derivatives. A wider hedge against the ETF like the Simplify Volatility Premierm ETF (SVOL) which can generate a yield from swings in the Cboe Volatility Index. This hedge is less specific than the PFIX but it gives investors a bigger safety net in any of the scenarios above or unforeseen risks in the economy.

FINSUM: Honestly leave the bond hedges to the past as there is no return. Instead, SVOL and PFIX are hedges that will likely clip the Treasury return anyway and provide more relief in case equities go upside down.

Artificial Intelligence is one of the fastest-growing segments of technology, and while most people think of AI as a computer listening to their conversations to send them advertisements it’s growing just as rapidly in the world of finance. In 2019, AI and machine learning was a $6.67 billion dollar segment of the financial world according to a study by Mordor Intelligence. That number is expected to more than triple by 2025 as the projection is $22.6 billion. Additionally, Business Insider pins the savings to financial institutions and banks by AI at $447 billion in the next two years. Magnifi can bring these powerful tools to your advising team to put research insights, analytics, and custom solutions for your clients at your fingertips. Magnifi uses natural language intelligence that can filter thousands of investment opportunities to provide the best opportunities to your clients, and these features are as simple to use as a Google search.

(Washington)

Rollovers are about to see a huge change. Advisors have largely been sleeping on the effects of the new fiduciary rule, largely because the current one was drafted under Trump and is thus milder. However, what many don’t realize is that come December, rollovers are going to be a lot more complicated. According to Fred Reish, leading industry attorney, the new rule “has turned the rollover world on its head”. Speaking further and addressing compliance, he added “A whole series of steps have to be taken to adjust to this standard”.

FINSUM: Okay so here is the reality. Full implementation begins in December, but the DOL may grant a last-minute stay because it is working on a full new fiduciary rule draft (Biden’s version). In either event, the new rule will certainly not be lighter than this version.

(New York)

Model portfolios are seeing great inflows recently, but their popularity has created its own problems. The biggest of those problems—a dizzying proliferation of funds. Today we are going to make an off-the-cuff recommendation. How about a one-stop, no fee “model portfolio” for retirement. The model portfolio? Buy these four ETFs: the Vanguard Total Stock Market ETF (VTI), the Vanguard Total International Stock ETF (VXUS), the iShares Core Total USD Bond Market ETF (IUSB), and the Schwab US REIT ETF (SCHH).

FINSUM: This is in jest of course, but this is a dead simple and well-conceived set of ETFs for retirement.

(New York)

ESG has been growing hand over fist, but it is still getting a lot of flak in the press. Two major reasons why. Firstly, many feel the sector’s performance is in question, largely because older investors believe there is an intrinsic misalignment between social & environmental goals, and returns. Secondly, many are starting to question whether ESG is really making an impact on society and the environment. Well, we cannot answer the second question, but number one has some new evidence. Morningstar recently ran an analysis of ESG funds, and found that: “25 out of 26 ESG equity index trackers beat funds that were conventionally weighted by market capitalisation, when it came to tracking the most common benchmarks last year”.

FINSUM: Proof of ESG outperformance depends highly on the timeframe being observed and the funds in question (which makes sense). For example, the last 18 months has been great for ESG because of some initial responses to the pandemic. Our view is that a lack of relationship to either out- or underperformance are both a good thing, since ESG is still accomplishing a social benefit and thus is a solid choice in the absence of any negatives to the investor.

(Washington)

Advisors and their clients have spent much of this year worrying about Biden’s tax plans. Two of Biden’s budgetary priorities to raise tax revenue fall squarely on the wealthy: nearly doubling capital gains taxes and the elimination of the step-up in basis in inheritance. Well, speaking on condition of anonymity, according to Bloomberg, Washington insiders are saying the elimination of step-up in basis (often panned as a “death tax” by critics) seems be heavily watered down, or maybe dead altogether. The proposal received heavy opposition and Democrats may have already backed away from its inclusion in the budget plan, or may go with a heavily diluted proposal.

FINSUM: So there is also a big knock-on effect here as well—it means the Democrats likely won’t hike the capital gains taxes to 28% or more on the wealthy, as hiking it much without having eliminated the step-up in basis will likely end up costing the government money.