Markets
Asset managers are increasingly rolling out tax-managed products, with investments in these vehicles seeing notable growth. Assets in tax-managed separately managed accounts (SMAs) surged to over $500 billion, a 67% increase within 18 months, while tax-managed mutual funds grew by 22% to $73 billion, according to Morningstar.
Direct indexing dominates tax-managed SMA assets, offering customized tax management by investing in individual stocks within an index, though other strategies like ETF model portfolios and active equity are gaining traction.
Morgan Stanley’s Parametric leads this area, managing $245 billion, mainly through direct indexing. Morningstar anticipates direct indexing will stay prevalent, but asset managers like JP Morgan’s 55ip and AB are exploring alternatives, focusing on model portfolios and municipal bonds for tax advantages.
Finsum: We may see more unified managed accounts, which integrate various investment types, creating more comprehensive tax management options.
A recent Goldman Sachs survey reveals that investors are enthusiastic about separately managed accounts (SMAs). Financial advisors appreciate SMAs for their professional management, customization, transparency, tax efficiency, and diversification benefits.
Chris Mankoff of JTL Wealth Partners finds SMAs advantageous for aligning with clients' preferences and optimizing tax strategies. While there have been challenges in the past with SMAs but the recent technological advancements have made them more accessible and effective.
Direct indexing, a step beyond SMAs, leverages technology for customized tax management and ESG preferences. Despite their benefits, SMAs may not be suitable for all clients, particularly those with smaller portfolios or predominantly pretax investments.
Finsum: While SMAs might not be for all, with a sizeable portfolio technology makes them easier for advisors to manage.
The gigantic win for spot Bitcoin ETFs with the SEC represents a significant milestone in facilitating compliant access to the leading cryptocurrency. Since January 10, inflows exceeding $10 billion have bolstered optimism for Bitcoin and the broader market outlook. For retail investors, these ETFs offer a streamlined pathway to securely backed Bitcoin, simplifying the complexities associated with managing private keys.
As institutions grapple with meeting client demand for digital asset exposure, crypto separately managed accounts (SMAs) have emerged as a complementary investment solution gaining traction among wealth managers, family offices, and registered investment advisors (RIAs). SMAs, a staple in traditional asset classes, allow for direct ownership of underlying assets and provide customizable portfolios tailored to individual client preferences and investment strategies.
With their ability to offer regulatory compliance, security measures, and tax optimization strategies, SMAs present a compelling option alongside spot Bitcoin ETFs for navigating the evolving landscape of digital asset investments.
Finsum: SMAs are a great pathway to optimize tax structure for investors and get simplicity in a turbulent alternative space like crypto.
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Investors with over $250,000 are increasingly turning to separately managed accounts, allowing them to handpick municipal bonds with professional guidance. These accounts now hold $987 billion in assets, surpassing mutual funds, which hold about $769.7 billion.
This shift has significantly boosted business, with Franklin Templeton seeing a 50% increase in assets under management over the past year and a half. Lowering the minimum investment to $250,000 has made these accounts more accessible, though still beyond the reach of most Americans.
However, advancements in technology are driving further accessibility, with potential for minimums to drop to $100,000 in the near future. With artificial intelligence breaking down barriers by making management for portfolio quicker to digest the minimums are bound to fall.
Finsum: The SMA explosion is here to stay in the fixed income market and managers should watch the evolution.
US Treasuries continue to move lower as hopes for a pivot in Fed policy are eroding. From the start of the year, the yield on the 10-year has climbed from 3.9% to above 4.3% to reach their highest levels since November. In total, it has retraced nearly half of the rally that began in October of last year.
Over this period, the number of rate cuts expected in 2024 has declined from 6 to 3 as has the timing. Primarily, this is due to the economy remaining strong as evidenced by the labor market and inflation that has proven to be more entrenched than expected. All in all, the narrative has certainly changed as some now believe the Fed may actually hike rates further especially as there are indications that the steady decline in inflation has ended.
Minutes from the last FOMC meeting also showed that committee members are concerned about the risk of inflation re-igniting if it begins to cut too soon. Overall, it remains ‘data-dependent’. However, all the recent data has undermined the case for immediate or aggressive cuts. According to Rich Familetti, CIO of US fixed income at SLC Management, the current Fed stance "is going to make it very hard for rates to fall much further from here… The pain trade is at higher rates and we will likely experience that."
Finsum: Treasuries continued their losing streak as higher interest rates have weighed on the entire fixed income complex. The market is now expecting 3 cuts in 2024 down from 6 at the start of the year.
With a strong recovery in fixed income over the past couple of months, fixed income fund managers are looking to generate inflows from the nearly $6 trillion that is sitting in money market funds. Some portions will certainly move into fixed income especially if interest rates start to move lower, and investors look to move further out on the curve to take advantage of still attractive yields.
Due to this, active fixed income funds delivered their biggest monthly returns in decades, leading to a surge of inflows. Recent economic data and chatter from FOMC officials have also been supportive of the asset class.
The challenge for managers is the explosion in active fixed income funds over the last few years, leading to price wars for market share and consolidation. Many are from the largest asset managers like Vanguard, State Street, and Blackrock, which have very low costs. Funds that aren’t able to sufficiently attract inflows over this period will only face more difficulties in the future in remaining viable.
According to Rich Kushel, the head of Blackrock’s portfolio management group, “We are in a winner-takes-a-lot moment. If you’re truly adding real alpha, there will always be a place for you in this industry. For the folks who haven’t, you might as well buy [the benchmark].”
Finsum: There is nearly $6 trillion on the sidelines. Some of this will move into fixed income especially if rates start dropping. There will be intense competition among active funds to be a recipient of these inflows.