Recent economic data and tea leaves from Fed officials have resulted in more challenging conditions for fixed income. Essentially, there is much less certainty about the timing and direction of the Fed’s next move as economic data and inflation have been more robust than expected. 

According to Michael Arone, chief investment strategist at State Street, this presents an opportunity with high-yield bonds given that yields are at attractive levels while a strong economy indicates that defaults will remain low. So far this year, high-yield bonds have outperformed with a slight positive return, while the iShares Core US Aggregate Bond ETF (AGG) and Vanguard Total Bond Market ETF (BND) are down YTD.

This is a contrarian trade as high-yield bond ETFs have had $387 million of outflows YTD, while fixed income ETFs have had $2.8 billion of net inflows YTD. It’s also a way for fixed income investors to bet that the US economy continues to defy skeptics and avoid a recession despite the Fed’s aggressive rate hikes. 

Currently, high-yield bonds have an average spread of 338 basis points vs Treasuries. Many of the most popular high-yield ETFs have effective durations between 3 and 4 years which means there is less rate risk. Spreads have remained relatively tight and could widen in the event of the economy slowing. 

Finsum: High-yield ETFs are offering an interesting opportunity given attractive yields. This segment of the fixed income market also is benefiting from recently strong economic data which indicates that default rates will remain low.

An unusual recurrence in the markets is the ‘January effect’. This is the phenomenon of downgraded debt consistently outperforming in the first month of the year. This has taken place in 18 out of the past 21 years. 2024 is no different as the ICE US Fallen Angel High Yield 10% Constrained Index outperformed the ICE BofA US High Yield Index by 56 basis points. This year, the fallen angels index is composed primarily of real estate, retail, and telecom. 

JPMorgan sees some risks of further downgrades in the coming months. Currently, the high-yield market is collectively worth $1.3 trillion. Of this, $1.05 trillion is rated BBB- by at least one rating agency, and $111 billion is on negative watch by at least one agency. The bank sees risk of sector-specific weakness in real estate leading to more downgrades. It also notes a lesser risk of the economy slowing leading to more downgrades.

Over the last 3 months, 5 REITs have joined the fallen angels index and now comprise 12% of the index. Some issues are leverage, lower renewal rates, lack of recovery in office vacancies, and higher insurance costs. The sector is expected to remain under pressure, especially in commercial real estate, as $2.2 trillion in loans is expected to mature between now and 2027. 

Finsum: REITs are the largest component of the fallen angels’ index due to secular issues in commercial property and cyclical pressures created by high rates. 

BNP Paribas conducted its annual alternative investment survey which revealed some interesting insights. There were 238 respondents, collectively representing $1.2 trillion in hedge fund assets, who were surveyed in December 2023 and January 2024. 

Many allocators are expecting a regime change with more opportunities for alpha and beta with US equities underperforming. This type of environment is more amenable to hedge fund performance. 

In contrast, hedge funds struggled in 2023 with an average return of 7.6%, while the S&P 500 was up 24%. It was the inverse of 2022 when hedge funds outperformed while both fixed income and equities were down double-digits. Interestingly, hedge funds outperformed global equity markets by 5.7% over the full 2 years. 

Going forward, allocators seem bullish on hedge funds. History indicates the asset class outperforms during periods of ‘high, stable rates. Over the last 2 years, allocators increased their expected return from 7.5% to 9.1%, which is the highest over the last decade. 

In 2023, there was a $100 billion in net outflows due to rebalancing flows, underperformance, and competition from risk-free returns at 5%. This year, survey respondents are expected to add $17 billion on a net basis. 

Finsum: BNP Paribas conducted a survey of asset allocators. They are increasing allocations to hedge funds as the asset class has historically outperformed in high, stable rate environments.

The value of your financial advice practice hinges on several key factors when you approach succession, including client stability, profitability, and operational efficiency. The latter factor often gets overlooked, yet it plays a crucial role in attracting potential successors and maximizing your final valuation.

While a buyer assesses revenue and profit potential, they also evaluate the effort required to maintain that profitability. Inheriting a complex, inefficient practice, no matter how lucrative, could deter buyers due to the sheer "pain-in-the-backside" factor. Remember, no one wants to inherit a mess.

Therefore, streamlining your operations becomes crucial as you prepare for the transition. Focus on simplifying workflow, automating tasks, and leveraging technology to create a well-organized, easily manageable practice. This enhances your current practice and significantly increases its attractiveness to potential successors, ultimately leading to a smoother, more rewarding transition.

Finsum: When it comes to selling a practice, it’s not just how profitable it is that matters. How operationally efficient the practice is may matter more.

A financial movement of massive proportions is unfolding: billions of dollars are flowing from 401(k) plans into rollover accounts. Advisors see this as a golden opportunity, and research suggests this trend will persist, offering a potential boost to their businesses.

However, unlocking this opportunity requires understanding participant behavior. Notably, a significant portion of advisor-assisted rollovers involve existing client relationships. This underlines the crucial role of building rapport with individuals early in their careers, well before they face rollover decisions.

While establishing connections is paramount, not all advisors have the resources to cater to every participant. This has led to a collaborative approach, with some advisors partnering with recordkeepers to segment participants. In this scenario, advisors focus on those participants whose account balance size requires more time and effort to service, while recordkeepers assist others.

This partnership approach ensures participants receive the best solution, regardless of account size. It also transforms the advisor-recordkeeper dynamic from adversarial to cooperative, creating a win-win situation for all involved.

By actively fostering relationships and embracing strategic partnerships, advisors can effectively ride the rollover wave and expand their wealth management reach. This requires a proactive approach, recognizing that long-term relationships are invaluable in capturing this lucrative opportunity.

Finsum: The key to capturing 401(k) rollovers lies in building relationships; with plan participants and plan recordkeepers.