Displaying items by tag: fixed income

There is increasing signs of a turnaround in the bond market given compelling valuations, attractive yields, and indications that the Fed is done hiking rates. While many investors will instinctively look to move into passive fixed income funds, active fixed income offers some specific advantages. 

Over the last decade, active fixed income managers have outperformed their benchmark more than 75% of the time even after taking all fees into account. According to Joseph Graham, the Senior Managing Director, and Head of the Investment Strategist Group at Lord Abbett, this is due to several unique factors which make the fixed income market inefficient.

The primary reason is that institutional fixed income investors such as banks, insurance companies, and central banks make decisions based on non-economic factors such as regulations or market stability. This can distort pricing and create opportunities for savvy managers. 

Another inefficiency is that benchmarks are weighted by the amount of debt outstanding. This means that borrowers with considerable amounts of debt are overrepresented. Similarly, indices often have constraints around size and maturity, creating opportunities for alpha around these under-owned securities. Asset managers with teams that specialize in a particular niche are particularly well-suited to discovering such pricing discrepancies.

Finsum: Active fixed income has outperformed passive fixed income funds. Some of the reasons that the fixed income market is inefficient are because many market participants have non-economic incentives and indices are skewed to overrepresent borrowers with considerable amounts of debt. 

The last FOMC meeting saw the Fed put a pause on hikes. Recent economic data, specifically softer inflation prints, is also supporting the notion that the Fed’s next move will be to cut rather than hike. Adding fuel to the rally was comments from Fed governor Christopher Waller that Fed policy was ‘well-positioned’ to bring inflation back down to its desired level. Waller’s concession is noteworthy given that he has been among the most hawkish FOMC members.

It’s already resulted in longer-term yields dropping, as the 10-year yield has declined from 5% in mid-October to 4.3%. As a result, equities have surged higher, and bonds posted their best monthly performance in nearly 40 years. The Bloomberg US Aggregate Bond Index was up nearly 5% in November. This performance is likely to attract inflows especially as bonds will further strengthen if the economy does fall into a recession. 

With these gains, the asset class is now slightly positive on a YTD basis. Many investors may also be eager to lock in these rates especially as the ‘higher for longer’ narrative around interest rates seems to be passing. There’s also increasing chatter of a rate cut as soon as spring of next year, while the odds of another hike have diminished. 

Finsum: Bonds enjoyed a strong rally in November. Some of the major factors behind this strength were dovish comments from FOMC members, soft inflation data, and the Fed nearing the end of its hiking cycle.

Northwestern Mutual is expanding its offering of professionally managed investment portfolios. The firm is launching a new category of model portfolios that are accessible to younger and less affluent investors.

The initiative is called the ‘Signature Portfolios Market Pathway’ and requires a minimum investment amount of $5,000. The intention is to create a ‘straightforward approach to investing’ through low cost, diversified and broad ETFs that provide exposure across Northwestern Mutual Wealth Management’s strategic asset classes. There are five types of model portfolios that are available that vary based on risk tolerance. Obviously, the larger goal for the firm is to provide opportunities for advisors to connect with a younger generation of investors who are ready to begin their financial planning journeys.

Northwestern Mutual is positioning itself to appeal to a younger generation and for the major transfer of wealth that is set to take place over the next couple of generations. The company’s average age for an advisor is 39, while it’s 57 through the industry. Currently, it’s the 5th largest independent broker-dealer in terms of revenue, has more than 6,700 advisors, and counts more than $250 billion in assets. 

Finsum: Northwestern Mutual is launching a new initiative which lowers the investment threshold to $5,000 to access the company’s model portfolios.

Macquaire Asset Management, an Australian financial services company with $575 billion in assets and major presence as an operator in the background of the ETF market, launched its first US-listed ETFs this week. Macquaire has previously been involved with ETFs as a custodian, market marker, and advisory firm as well as providing seed capital for other funds. 

Now, it’s making a more aggressive move into ETFs in 2023. Earlier this year, it partnered with BondBloxx to serves as a subadvisor to the BondBloxx USD High Yield Bond Sector Rotation ETF (HYSA), which launched in September.  

This week, it launched 3 ETFs. The Macquaire Global Listed Infrastructure ETF (BILD) and the Macquarie Energy Transition ETF (PWER) are equity funds offering thematic exposure. It also launched a fixed income ETF - the Macquarie Tax-Free USA Short Term ETF (STAX). STAX invests in tax-exempt US bonds with maturities 1 and 5 years. 

This continues a major theme of 2023 which has been the proliferation of active ETFs. Macquaire has also indicated that it plans to launch more active ETFs in the coming years in the US and globally.

Finsum: Macquaire Asset Management is listing its first ETFs. The firm has previously been a player in the ETF space in background roles as a custodian, market marker, advisory, and seeder of funds.

For cautious-minded investors, active fixed income could be a much better option than cash. This is according to SPDR Exchange Traded Funds’ Managing Director and Head of Research, Matthew Bartolini, who notes that some of the major advantages of active fixed income are that it offers more flexibility, consistent performance, and can be more tax efficient. Overall, it can help portfolios generate income, dampen volatility, while still retaining exposure to upside opportunities. 

Many advisors and investors are already aware of these benefits as active fixed income has taken a large portion of flows relative to its size compared to passive fixed income and equity ETFs. As Bartolini notes, “Active fixed income has been really a consistent engine of support within the active [ETF] construct — not only from flows but also returns.” Another factor in active fixed income’s growth is that it allows investors to take advantage of elevated yields. 

Bartolini also believes that future returns will be appetizing for the asset class, although there will be some volatility to stomach. He also believes that cash is less desirable due to the reinvestment risk. His major focus is on constructing portfolios to generate income while properly balancing risk. 

Finsum: Active fixed income is seeing major growth in terms of inflows. Here’s why the asset class is well-positioned for the current moment given the combination of elevated yields and an uncertain macro environment.