In a recent interview with ESG Clarity, Morningstar CEO Kunal Kapoor offered his thoughts on direct indexing and how custom features could lead to more people being interested in investing. Kapoor mentioned that while separate accounts were always touted as providing customization, in reality, most separate accounts did not provide much customization. That’s why he is so excited about direct indexing. He stated that, “the cool thing about building a direct index is that at the start, the adviser’s having this conversation with the client, not only about the risk profile, risk tolerance, time horizon – but suddenly the conversation is about preferences.” He believes that these preferences get clients engaged with their advisors. He said, that it can “allow an adviser to really drill into an individual’s preferences in an educated way – really walkthrough for the individual what the pros and cons are of implementing those preferences in a portfolio.” Kapoor also compared direct indexing to passive investing. He believes that while passive investing can be good for most people, it can take the fun out of investing. Direct indexing, on the other hand, has many of the benefits of passive investing, but it brings back the fun of making choices.

Finsum:Morningstar CEO Kunal Kapoor believes that direct indexing creates more engagement between advisors and their clients since it requires them to discuss preferences.

If your clients are invested in Chinese companies and have a preference for ESG, it may be time for a change in their portfolios. It appears sustainability rules in western countries are at odds with what’s happening in China. While Chinese equities offer strong growth potential, their ESG ratings rank lower than western nations and most emerging markets. For instance, Sustainalytics, a sustainable rating agency owned by Morningstar, downgraded three Chinese big-name tech companies on its watchlist in October. The three stocks, Tencent, Weibo, and Baidu, were moved to the category of “non-compliant with UN principles.” In addition, Hong Kong Watch, a UK-based group that researches investment and human rights issues in China, recently said in a report that “many of the biggest asset management, state pension, and sovereign wealth funds were passively invested in companies allegedly involved in the repression of Uyghur Muslims in China’s Xinjiang region.” The report found three major stock indices provided by MSCI included at least 13 companies that “have allegedly used forced labor or have profited from China’s construction of internment camps and surveillance apparatus in Xinjiang.” Another problem is that Chinese companies are less likely to respond to queries from ESG rating agencies.

Finsum:With ESG investing continuing to gain momentum, it appears that many Chinese companies are at odds with ESG due to censorship and repression in China.

After a tough year for fixed income, many bond strategists are expecting 2023 to be a great year for bonds. But where should advisors and investors look to invest? In an interview with Yahoo Finance Live, PIMCO Managing Director and Portfolio Manager Sonali Pier offered her perspective on where the sweet spot will be for bonds this year. She believes that despite potential volatility, “there’s a lot of room now for income-producing assets.” She stated, that “a sweet spot may be those Triple Bs within investment grade, for example, where dollar prices have come down a lot as a result of the interest rates rising as well as credit spreads having widened.” In the interview, she also talked about what areas of the corporate bond market to avoid. Her firm is most concerned with areas where there are “low multiples on businesses, low margins, high cyclicality, where it's very difficult to weather a storm like a recession when you have those types of things against you as well as still inflation as an impact.” She mentioned industries such as retail, autos, and wire lines to avoid that are seeing declines due to a “shift in investor demand as well as disruption from the supply chain.”

Finsum:PIMCO portfolio manager Sonali Pier believes that a sweet spot for bonds this year may be triple Bs within investment grade while avoiding industries such as retail, autos, and wire lines.

Last year was a terrible year for the markets, even for many hedge funds. According to investment data firm Preqin, hedge fund returns were down 6.5% in 2022, the largest drop since the 13% decline in 2008 during the financial crisis. That’s why global hedge fund managers are preparing for persistent inflation by seeking exposure to commodities and bonds that perform well in inflationary environments. A majority of 10 global asset and hedge fund managers that were surveyed by Reuters said commodities are undervalued and should thrive as global inflation stays elevated this year. In addition, they are also seeking inflation-linked bonds to shield against price rises, and exposure to certain corporate credit, as higher rates restore differentiation in company bond spreads. For instance, London-based hedge fund manager, Crispin Odey is betting inflation will remain high. He told Reuters that "Commodities will start to rise again. They've sold off very heavily and are below operating costs in many instances." Danielle Pizzo, chief strategy officer at Schonfeld Strategic Advisors, told Reuters that her firm “Aims to focus more on investment grade and high-yield bonds this year as well as commodities.”

Finsum:Hedge funds, which saw the largest drop in performance last year since the financial crisis, are concerned about persistent inflation and are seeking exposure to commodities and select bonds.

A recent survey found that investors are concerned about their retirement prospects and it’s easy to understand why. A combination of volatility, inflation, and recessionary fears is driving investors to check their retirement balances multiple times a week. Clients are certainly also voicing their concerns to their advisors. With both the equity and the fixed income markets seeing steep declines, there haven't been many places to hide unless an advisor has been employing some type of Relative Strength strategy. By focusing on Relative Strength, also known as momentum, an advisor can remove emotion and subjectivity from their investment process and potentially see higher returns for their clients even in market environments such as this.

For over 30 years, Nasdaq Dorsey Wright has created many innovative technical indicators based on momentum using Point and Figure charting. One of the most popular is the “Technical Attribute” rating. Their research has shown that a high attribute portfolio, which includes ratings of 3-5, has a strong propensity to outperform, with the largest outperformance reserved for the highest ratings. The technical attribute ratings are composed of five distinct Point and Figure chart attributes, including four relative attributes (two vs. the market and two vs. the sector), and one absolute attribute (trend). The absolute attribute is typically useful in limiting the downside, as a purely relative approach can leave a client exposed when everything is moving down at the same time. In a year, when only one sector (Energy) has a positive year-to-date price return, employing the “Technical Attribute” rating can help advisors make their clients feel more comfortable about their retirement prospects. 

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