In its Q2 active fixed income commentary, Vanguard discussed lowering rate hike expectations for 2024 due to strong economic data, while inflation remains stubbornly above the Fed’s desired levels. 

Despite the odds of a soft landing declining, Vanguard’s base-case scenario is that the Fed is done hiking and will hold rates at these levels until later this year. A risk to the firm’s outlook is inflation lingering above 3%, which would spark discussion about the need for further rate hikes. 

It sees monetary policy as remaining data-dependent and notes that the Fed has limited room to maneuver. The central bank risks another surge in inflation by cutting rates too soon, but it also risks a prolonged recession by cutting rates too late. 

Despite this uncertainty, Vanguard believes that there will be opportunities amid higher market volatility. It recommends investors take advantage of locking in attractive yields for longer durations and sees potential for better risk-adjusted returns in bonds vs. equities. Over the next 5 years, Vanguard forecasts returns of 4.5% for stocks and 4.3% for bonds. However, bonds are expected to have one-third of the volatility of stocks at 5.2% vs. 15.8%. 

Finsum: Vanguard shared its quarterly active fixed income outlook. The firm is downgrading its expectations for rate cuts in 2024, given recent economic data. Instead, it sees more opportunities in other parts of the fixed-income market.

Assets in model portfolios grew by nearly 50% over the last 2 years. By fully or partially outsourcing the investment management function, it frees up more time for advisors to focus on building their practice, client service, financial planning, and prospecting. According to a recent survey from Cerulli, 12% of advisors are using model portfolios primarily, with 22% using a hybrid approach. 

In addition to benefiting advisors, model portfolios have become a major distribution channel for asset managers such as Blackrock. Among asset managers, Blackrock has the most assets in model portfolios at $84 billion. Blackrock anticipates model portfolio assets exceeding $10 trillion within the next 5 years, more than doubling from $4.2 trillion currently. Model portfolios comprised 50% of flows from US investors into iShares ETFs last year.

WisdomTree is another major beneficiary of the boom in model portfolios. Last year, the company saw a 100% increase in the number of advisors using its model and had asset growth of 40%. It sees model portfolios as a ‘key growth driver’ for the firm in the coming years.

As model portfolios become a larger presence in wealth management, there will be large shifts of flows in and out of various ETFs depending on decisions made by asset managers. For instance, JPMorgan found that ETFs that were held in its model portfolios had significantly more inflows than ETFs not in model portfolios, at $80 billion vs. $30 billion. 

Finsum: Model portfolios are forecast to exceed $10 trillion in assets within the next 5 years. They are becoming increasingly integral for advisors and asset managers. 

2024 has proven to be a year of relentless volatility for fixed income, given mixed signals about inflation, the economy, and monetary policy. However, there are plenty of opportunities to make money amid these conditions. 

A consequence of high rates is that the US government is expected to pay more than $1 trillion in interest to bondholders this year, which is more than double the average from the previous decade. Currently, all Treasury securities are yielding more than 4%, and due to elevated rates, investors have a higher margin of safety. This means that fixed income is once again a source of meaningful income for investors and serves as a counterweight to equities.

Deal flow also remains robust, which is a positive for underwriters and sponsors. According to Bloomberg, bankers who underwrite bond offerings are expected to see a 25% increase in bonuses. In terms of sales and trading, bonuses are expected to rise by 20%, compared to an increase of 5% to 15% for equities. 

Another trend in fixed income is the electronication of the bond market. Traditionally, bond trading has been done over the phone or through banks, which has resulted in illiquidity and less price discovery. 

Now, volume is moving to electronic bond exchanges, which is benefiting market makers like Citadel Securities and Jane Street. These firms are now making markets in government and corporate bonds. It’s estimated that 42% of investment-grade debt trades were electronic last year, compared to 31% in 2021.

Finsum: Entering the year, many were confident that Fed rate cuts would fuel a bull market in bonds. This has failed to materialize, but there have been opportunities in fixed income.

Exploring art museums isn't a leisure reserved for those in the artistic community; it's an enriching experience for financial advisors too. These vibrant spaces offer valuable insights into innovation and creativity, which are essential qualities in the financial world. 

Artists are navigating an evolving technological landscape, that is mirrored throughout society including that in the financial world. Embrace the opportunity to explore art museums and discover how creativity can fuel success in the financial advisory realm. 

One of the most popular destinations in the world is the Museum of Modern Art in New York city which specializes in art from the 19th century onward. For those in the Midwest, the Art Institute in Chicago features great works by Frank Loyd Wright and is near many Chicago cultural touchstones. Finally, those on the west coast should visit the LACMA in Los Anges which touch many places in the contemporary and historical art landscape. 

Finsum: Art is also a rapidly growing alternative asset class and could provide a new perspective in investing.

Advisors are constantly looking for the latest tools that can help them manage their practice more efficiently without giving up returns in exchange. With the rapid developments in model portfolios, the technology is finally there to deliver the aforementioned goals in a timely manner. 

Utilizing these models helps advisors draw on institutional expertise while still customizing to address each client's unique needs, ensuring a consistent experience for all clients. This strategy combines the benefits of professional research with the advisor’s ability to manage and optimize portfolios, facilitating both improved performance and efficient firm scaling. 

By employing technology for asset research and replacement, advisors can integrate customization, allowing them to dedicate more time to client relationships and business growth.

Finsum: This efficiency gained by streamlining portfolio construction allows advisors to improve their relationships with clients.