Displaying items by tag: diversification

The term beta represents an investment’s volatility relative to the overall market and is a concept that experienced investors understand well. Beta measures the sensitivity of an investment to overall market movements and is a measure of systematic risk, with the market typically represented by a broad index like the S&P 500. 

High beta stocks exhibit more volatility and are typically growth stocks, while low beta stocks are less volatile and often include value stocks in defensive sectors. But this approach should be used when thinking about alternatives because they are being used to balance a portfolio.

Beta can change over time due to economic conditions and changes in a company's operations or industry. When assessing alternative investments, combining beta with correlation provides insight into an investment's potential role in a portfolio, enhancing diversification and risk management.

Finsum: You don’t need complicated financial models to assess beta, and integrating this historical return factor could greatly improve portfolio performance. 

In the past two years, retirement investors have funneled over $20 billion into US exchange-traded funds (ETFs) that limit both gains and losses, challenging traditional insurance products. These "buffered" ETFs capitalize on derivatives to cushion the effects of extreme market swings and have grown popular since their 2018 debut, especially after the market turbulence of 2020 and 2022.

The draw of buffered ETFs lies in their downside protection, which has become increasingly attractive to investors seeking to safeguard their retirement savings. Financial advisers in the US have embraced these ETFs, driving $10 billion in net inflows in both 2022 and 2023, while taking market share from the $3.3 trillion annuities market and costly structured notes.

This has grown not only the size but the scope of the market with 200+ defined outcome ETFs in the US, totally a staggering $37bn. In turn new competitors like BlackRock and AllianceBernstein are joining the competition to try and capitalize on the gains from First Trust and Allianz. 

Finsum: The uniqueness of buffer ETFs really is in how they integrate derivatives to drive performance and outcomes and can present nearly all in one solutions. 

A major trend in wealth management is personalization. Due to new technology, financial advisors are now able to offer customized products and solutions without sacrificing scalability. It can help clients reach their financial goals while also creating a stronger relationship between advisors and clients.  

A survey conducted of high net worth investors by PwC showed that 66% are interested in more personalization, while 46% are looking to change or add new advisors within the next couple of years. For advisors, offering personalized solutions will be increasingly important in terms of recruiting and retaining clients.   

Personalization is also impacting model portfolios. Until recently, most model portfolios were built around the traditional portfolio, combining stocks and bonds, which limited customization. Now, there are more options to customize model portfolios, including factors, themes, and values. 

According to research from MSCI, wealth managers can allocate to these strategies without worrying that they would have an adverse impact on a portfolio in terms of returns or diversification. Further, these model portfolios are customized but still retain their core benefits. For advisors, this means spending less time on investment management and more time on client service, financial planning, and growing the business. 

Finsum: Personalization is a major trend in wealth management. Now, model portfolios can be customized, which brings a variety of benefits for advisors and clients without having an adverse impact on returns or diversification.

Stringer Asset Management shared some thoughts on fixed income, monetary policy, and the economy. The firm notes that while inflation has remained stubbornly above the Fed’s desired levels, it will move closer to the Fed’s target over time. One factor is that the M2 money supply is starting to decline, which is a leading indicator of inflation. Another is that fiscal stimulus effects are finally waning.

Thus, Stringer still sees rate cuts later this year, although it’s difficult to predict the timing and number of cuts, creating a challenging environment for bond investors. During this period of uncertainty, it favors active strategies to help reduce risk and capitalize on inefficiencies. Active managers are also better equipped to navigate a more dynamic environment full of risks, such as the upcoming election and a tenuous geopolitical situation.

Stringer recommends that investors diversify their holdings across the yield curve and credit risk factors. It favors a balance of riskier credit with Treasuries. This is because the firm expects the bond market to remain static until the Fed actually cuts. It’s also relatively optimistic for the economy given that household balance sheets are in good shape, corporate earnings remain strong, and the unemployment rate remains low. These conditions are conducive to a favorable environment for high-yield debt. 

Finsum: Stringer Asset Management believes that fixed income investors should pursue an active approach given various uncertainties around the economy, inflation, and monetary policy in addition to geopolitical risks.

Over the last decade, private credit has boomed, growing from $435 billion to $1.7 trillion. One consequence of this has been a growing marketplace for private credit secondaries. Currently, the private credit secondary market is estimated to be worth $30 billion, but it’s forecast to exceed $50 billion by 2027.

The secondary market is where private credit investors can sell their stake early. It’s natural that as allocations to private credit have increased, there is now a need for liquidity, which is provided through the secondary market. Most of it is driven by investors looking to rebalance their holdings. Another benefit is that it can potentially provide diversification to private credit investors. Some managers are now fundraising for funds dedicated to the private credit secondary market, such as Apollo Global Management and Pantheon.

There is also an analogue between the private equity secondary market and the private credit secondary market. Although the private equity secondary market is more mature and larger at $100 billion, with many more established funds in the space. According to Craig Bergstrom, managing partner and CIO of Corbin Capital Partners, “I don't think private credit secondaries will ever get to be as big as private equity secondaries. And I don't think they'll even get to be as large as private credit is in proportion to private equity because the duration is shorter.”

Finsum: A consequence of the boom in private credit is a growing and active market for secondaries. It’s evolving similarly to the secondary market in private equity and is forecast to exceed $50 billion by 2027.