In 2023, private credit funds managed $550 billion in assets and generated 12% in average returns for investors. Private credit has been ascendant the last couple of years and helped private equity firms find a new source of revenue. 

As public market financing become less available, direct lenders extended credit to small businesses and buyout deals, replacing syndicated loans and the high yield bond market. It resulted in private credit growing from less than $100 billion in 2013 to its current size.

This year, investment banks are once again stepping into the fray. So far, $8.3 billion of private market debt has been refinanced via syndicated loans, indicating that the high yield bond market in the US is once again a viable option for companies. In leveraged buyouts, banks are also competing as evidenced by JPMorgan’s financing of KKR’s purchase of Cotiviti, a healthcare tech company.

Spreads for syndicated loans and high yield bonds have dropped to thier lowest levles in 3 years. Rates are now between 200 and 300 basis points below what private credit lenders were offering in December. 

Private equity firms are expected to pivot into higher quality, asset-backed financing such as credit card debt and accounts receivables to replace revenue from private credit. They would also benefit from an improvement in public market sentiment and liquidity as they are sitting on a backlog of unsold investments in portfolio companies. 

Finsum: The private credit market has boomed over the last couple of years due to anemic public markets and hesitant banks. Now, banks are once again competing for business and offering more favorable terms.

Natixis conducted a survey of 500 investment professionals, managing a combined $35 trillion in assets. The survey showed that investors are adjusting their allocations in expectations of more volatility in 2024 due to more challenging macroeconomic conditions. 

A major change in the survey is increasing preference towards active strategies as 58% noted that active outperformed passive for them in 2023, and 63% believe active will outperform this year. Overall, 75% of professionals believe that being active will help in identifying alpha in the new year. 

In terms of fixed income, 62% see outperformance in long-duration bonds, although only 25% have actually increased exposure due to uncertainty about the Fed. In addition to increasing duration, many are interested in increasing quality with 44% looking to increase exposure to investment-grade corporate debt and US Treasuries. 

Money continues to flow to alternatives with 66% believing that there will be significant delta between private and public market returns. Within the asset class, fund selectors are most bullish on private equity and private debt at 55%. 

With regards to model portfolios, 85% of firms now offer them either in-house or through third-party firms. Due to increasing demand, the number of offerings are expected to increase. Benefits include additional diligence and increased odds of client retention during periods of uncertainty. They also help form deeper relationships with more trust between advisors and clients, leading to more of a relationship focused on comprehensive, financial planning. 

Finsum: Natixis conducted a survey of 500 investment professionals and found that model portfolios are increasingly popular. Another major theme is that volatility is expected to remain elevated in 2024 due to uncertainty about the economy and Fed policy. 

Bond yields modestly rose following the February consumer price index (CPI) report which came in slightly hotter than expected. Overall, it confirms the status quo of the Fed continuing to hold rates ‘higher for longer’. Yields on the 10-year Treasury rose by 5.1 basis points to close at 4.16%, while the 2-Year note yield was up 5 basis points to close at 4.58%. 

The report showed that the CPI rose by 0.4% on a monthly basis and 3.2% annually. Economists were looking for a 0.4% monthly increase and 3.1% annual. While the headline figure was mostly in-line with expectations, Core CPI was hotter than expected at 3.8% vs 3.6% and 0.4% vs 0.3%. The largest contributors were energy which was up 2.6% and shelter at 0.4% which comprised 60% of the gain.

Based on recent comments by Chair Powell and other FOMC members, the Fed is unlikely to begin cutting unless inflation resumes dropping or there are signs of the labor market starting to crack. Current probabilities indicate that the Federal Reserve is likely to hold rates steady at the upcoming FOMC meeting, especially with no major economic data expected that could shift their thinking. 

Finsum: The February jobs report resulted in a slight rally for bonds as it increased the odds of a rate cut in June. Most strength was concentrated on the short-end of the curve.

The 2006 vintage of buyout funds remains etched in the memory of private equity investors who endured the global financial crisis (GFC), despite eventual recovery. Unlike typical fund vintages following a predictable "J curve," 2006 saw a deviation, marked by record capital investment before the financial markets' collapse. 

Recent fund vintages show alarming parallels to 2006 according to a report by Bain & Co, sparking concerns among limited partners about trapped capital and delayed returns. While historical challenges offer valuable lessons, today's private equity portfolios differ, with varied exit strategies and market conditions. 

Nonetheless, fund managers must proactively manage portfolios to generate distributions, prioritizing liquidity to satisfy investor expectations and secure future allocations.

Finsum: Lower interest rates could begin to free up capital for return distribution in 2024.

Vanguard celebrated changes in its fixed income leadership during the closing of the stock market at the Nasdaq in New York, and it continues to be a leader in Active Bond ETFs.

 The recently launched Vanguard Core Bond ETF (VCRB) and Vanguard Core-Plus Bond ETF (VPLS), managed by experienced members of the Vanguard Fixed Income Group, have shown strong performance compared to their peers over the past decade. 

With growing demand for active fixed income ETFs, particularly evident in the success of Vanguard Ultra-Short Bond ETF (VUSB), investors are seeking strategies that can adapt to market changes, especially with anticipated rate cuts by the Federal Reserve in 2024. Both VCRB and VPLS offer potential solutions, boasting relatively low expense ratios and providing complementary options to Vanguard's existing fixed income lineup.

Finsum: Rate cuts are a key reason to consider moving your bond ETF exposure to a more active lens in 2024

Buffer ETFs have surged in popularity among financial advisors aiming to placate nervous clients while maintaining their investment positions. Their widespread adoption has led to major expansion, from less than $200 million to $36.7 billion since 2018, according to Morningstar. 

Operating on the defined outcome strategy, buffer ETFs use equity options to mirror benchmark performance while offering downside protection in exchange for an upside cap within specific 12-month life cycles, available monthly or quarterly. 

Jeff Schwartz, president at Markov Processes International, underscores the importance of comprehending the intricacies of these vehicles, given the multitude of variables involved, and that the intricacies around the buffer and cap structure are pivotal. Advisors must carefully consider market conditions when purchasing buffer ETFs at any point during their lifecycle to prevent diluting the intended benefits. 

Finsum: Timing conditions are still important when it comes to buffer ETFs despite their built in protections.

Gary Gensler, the chairman of the Securities and Exchange Commission (SEC), spoke recently at the Investment Adviser Association Compliance Conference. In a Q&A session with reporters, he remarked that there were no current plans to modify or update Reg BI. Instead, the agency’s focus is on ‘examining for and enforcing against’ Reg BI.

In later remarks, he addressed its approach towards predictive data analytics. He believes this is a gray area, and the SEC wants to ensure that there are no conflicts of interest within newer technology that utilize behavioral prompts and nudges. Of course, this topic is even more germane given the increasing use of artificial intelligence (AI) powered applications. 

Gensler wants to ensure that there are no loopholes to bypass the fiduciary rule. Many in the industry contend that this rule is a backdoor expansion of Reg BI and that current regulations were sufficient. 

Previously, Gensler had spoken that the new technology enables practices to micro-target consumers with products and content. While this can help advisors grow their business, he believes this communications channel needs to be regulated as well to ensure that these business interests are not placed above the clients’. 

Finsum: At a recent conference, SEC Chair Gary Gensler pushed back that there was a backdoor expansion of Reg BI due to the predictive analytics rule. The rule mandates that predictive technology that communicates with clients must also follow the fiduciary rule.

While the Federal Reserve has been successful in lowering inflation over the past 21 months, it still remains uncomfortably high. The consumer price index (CPI) peaked at 9.1% in June 2022 and reached 3.1% in its last reading which remains above the Fed’s 2% target.

Equally relevant, many of the disinflationary impulses which drove the rate of inflation lower have subsided, while there are indications of nascent inflationary pressures budding. For markets, the implication is that the status quo prevails with the Federal Reserve holding rates at 5.50% since July of last year.

While bonds enjoyed a decent rally as the Fed moved from hiking to holding steady, volatility remains elevated due to the current uncertainty about inflation and Fed policy. As a result, the bulk of gains in fixed income proved to be fleeting. According to John Hanock, these conditions are ideal for active fixed income as managers will be able to take advantage of inefficiencies and dislocations caused by the current environment.

The firm believes that active managers will be able to outperform by overweighting quality, intermediate-term bonds, and defensive sectors. It also likes mortgage-backed securities (MBS) due to attractive yields without sacrificing quality. In contrast, it wants to underweight cyclical sectors and high-yield bonds given its concerns about a weakening economy in the second-half of the year. 

Finsum: Volatility has risen for fixed income ever since the outlook for inflation and Fed policy have gotten murkier. Here’s why John Hancock believes active fixed income is the ideal way for investors to take advantage of attractive yields. 

Fidelity recently conducted a survey of advisors and found that only 26% currently have exposure to alternative investments. In contrast, 86% of institutional investors have exposure to the asset class. 

The survey also revealed that many advisors are looking for more resources to help them evaluate various alternative offerings before they feel comfortable recommending them to clients. This is despite other surveys showing that many advisors would like to increase allocation to alternatives due to their benefits such as diversification and non-correlated returns. 

Specifically, advisors cited the need for more due diligence on strategies and managers in addition to concerns about liquidity as obstacles to adoption. Many also indicated the difficulty of communicating with clients about these products given the number of options and complexities.

Adding to the challenge is that each clients’ appropriate exposure to alternatives depends on factors like time horizon, liquidity needs, and eligibility. This level of customization increases the burden on advisors to understand various options in a comprehensive manner. 

In order to address these problems, Fidelity is expanding research on various alternative investment strategies. Initially, the research will focus on private credit, private real assets, and private equity funds. According to the company, these types of tools and resources will accelerate adoption of alternatives by advisors. 

Finsum: A recent survey by Fidelity showed that many advisors have been slow to adopt alternatives. A primary reason is that advisors have a need for more due diligence on the various products and strategies before they feel comfortable recommending them to clients.

The Bureau of Labor Statistics reported that the US added 275,000 jobs in February which was slightly higher than expectations. However, the report indicated some softening in the labor market as job gains in January and December were revised lower by a collective 167,000, and the unemployment rate inched higher to 3.9%. 

It resulted in bonds moving higher as odds increased that the Fed would cut rates in June. Additionally, the number of hikes expected in 2024 also rose from 3 to 4. Most strength was concentrated on the short-end, which is more sensitive to Fed policy as yields on the 2-Year Treasury note declined by 10 basis points. There was much less movement on the long-end as the 10-year Treasury yield was lower by 3 basis points. Earlier this week, bonds also caught a bid as Chair Powell’s testimony to Congress was interpreted as being dovish. 

Overall, the jobs report perpetuates the status quo in terms of the Fed remaining data-dependent, while the path of the economy and inflation remain ambiguous. On one hand, wages and the labor market have defied skeptics who were anticipating a downturn. But there has been acute weakness in areas like manufacturing and services which have historically coincided with a weakening economy. 

Finsum: The February jobs report resulted in a slight rally for bonds as it increased the odds of a rate cut in June. Most strength was concentrated on the short end of the curve.