(New York)

The move towards passive management has been worthy of the term “flood”, with investors pouring funds into ETFs and out of mutual funds. Fees have been a major part of that shift, but performance has been too, as active management performance has been broadly weak over the last decade. However, there are some areas where mutual funds have significantly outperformed passives—international funds. Especially in emerging markets (e.g. India and Mexico), but also in developed ones like the UK and Italy, 10-year track records show significant outperformance for active managers. The opposite is true in US funds.

FINSUM: Sifting through market opportunities gets harder and harder (and finding alpha alongside it) as you move into less liquid markets. Accordingly, we think there is a lot of benefit to using actively managed funds for international stocks.

(New York)

If there was ever a stat that really represented the big changes underway in the wealth management industry, it is this one: a new survey shows that broker-dealers are earning more revenue from fees than they are commissions. That is a major shift for the group, who until recently existed mostly as commission engines. The stat also reflects the growing trend towards dually-registered B-D/RIAs, allowing advisors to perform both functions.

FINSUM: The regulatory trend and customer trend is moving towards fee-based payment. This stat reflects just how pervasive the model is becoming.

(New York)

New payroll data has just been released and it is not saying anything positive about the underlying economy. According to ADP payroll figures, the US economy created 183,000 jobs in February, under estimates of 190,000 and well below the total of 300,000 in January. According to Moody’s analytics, “The economy has throttled back and so too has job growth”. The slowdown is most acute in the retail and travel industries and at smaller companies.

FINSUM: This is a pretty sharp pullback from January. The total number is still positive, but it will be interesting to see if this becomes a trend.

(Washington)

One of the most contested parts of the 2010 Dodd-Frank legislation was the legal mandate the act gave to regulators to create pay caps for Wall Street. The industry has fought tooth and nail to block their imposition, successfully curbing any changes for nine years. The last major push to cap pay was in 2016, but nothing has happened since then. Now a consortium of regulators, including the Fed, FDIC, and the Office of the Comptroller of the Currency and Federal Reserve are coming together to create new rules. The most likely target are high ranking executives, but talks in the past have extended to rank and file employees.

FINSUM: Caps for top executives will be anathema to some, but restrictions for regular employees are a whole other issue that will cause a major uproar.

(New York)

Fund fees are a hot area, and not just in terms of them falling in absolute terms. While everyone is aware of Fidelity’s new zero fee index funds and the price war going on in top line fees, there are also new and interesting fund structures emerging. One kind of new fee model is called a fulcrum structure, where fees are low (ETF-like) unless the funds outperforms its benchmark, in which case the provider gets a performance fee. This kind of structure is more popular with mutual funds and can offer the best of both worlds—low fees for ordinary performance, or outperformance that comes with active management.

FINSUM: We think these kinds of funds offer a better alignment of interest while offering multi-sided benefits. However, the risk is that managers are incentivized to take excess risk in an effort to boost performance over the fulcrum threshold.

(New York)

Stable income is in the best place it has been for years. The yield curve has stabilized with rates at reasonable levels, which means finding decent-yielding investments isn’t nearly as hard as it was a few years ago. That said, income investments, especially at the higher-yielding end, have pitfalls. With that in mind, here are some good income ideas. The picks come from Franklin Templeton’s $73 bn Income Fund. Some of the top names held (holding assets across the capital structure) are Chesapeake Energy, Tenet Healthcare, JP Morgan Chase, Wells Fargo, Softbank Group, and Bank of America.

FINSUM: This is a very energy and financials heavy group, which has its risks.

(New York)

JP Morgan is joining the bullish bandwagon. While fear that the rally has been too fast permeates across the markets, JP Morgan is stepping in to say that they think the market has plenty of runway higher. The bank thinks stocks have a good tailwind behind them as a trio of positive factors exist: a dovish fed, a stable yield curve, and pending US-China trade deal. The bank thinks that stocks look like they did right after the 2015-2016 correction cycle, a period right before a big bull run.

FINSUM: We are starting to think that shares may have some good runway left. The correction in P/E ratios was a very healthy adjustment to end the year, and the macro situation is looking positive.

(New York)

One of the big outcomes of the huge rout to end last year was that stock pickers had reportedly gone back to doing what they did best—picking individual stocks based on fundamental value, signaling a diversity of holdings. However, in aggregate, that view appears to be hogwash, as new data shows that institutional equity ownership in stocks is at its highest point in years. Goldman Sachs follows this data and tracks how many companies are among the 50 most owned by hedge funds and mutual funds alike. Right now it is 13, which is the highest level since 2017. Industrial and tech stocks were the most held.

FINSUM: The most concentrated stock holdings are, the more risk there is for steep falls in those names.

(Detroit)

The auto sector has had a pretty wild ride since the Financial Crisis. The first half decade after the bailout was pretty strong for autos, with sales growing and high margin SUVs jumping in volume. However, the shift to SUVs and away from cars has grown so great that it is causing the industry some headaches. Further, self-driving cars are a new source of opportunity, but also anxiety. A new survey shows the car industry is likely to join energy and retail as the most embattled sectors this year. Sales are widely expected to fall across the industry, putting further stress on car companies.

FINSUM: In great industry-speak, the threats facing the industry are currently called the “Bermuda triable: unfavorable economic conditions, disruptive forces, and changing consumer preference”. We can’t help but agree.

(Washington)

Once you admit that this 2019 rally is almost purely predicated on the Fed dramatically turning around its position on rates and the economy late last year, you come to a realization: it could all end so quickly. The market is very vulnerable to the Fed’s actions right now, so the question becomes—will the central bank turn hawkish? The short answer is that it doesn’t look like the Fed will get hawkish any time soon. New language released in the latest notes look even more dovish than in December. The key buzzword is that the Fed is looking to be “patient” on rates and says it would need clear upward signs in the economy to hike any further.

FINSUM: The Fed has set up another goldilocks situation for markets. So long as data is okay but not too good, asset prices will be fine. If some data comes out poorly, the market knows the Fed can cut rates. Are we in for another big bull run?