Wealth Management
For Vettafi’s Modern Alpha Channel, Scott Welch and Andrew Okrongly discussed how the WisdomTree Endowment Model Portfolios are faring given the volatile nature of markets over the past year.
Endowment models have recently been introduced to individual investors, and they typically offer broad and global diversification, more use of active strategies as opposed to passive ones, non-traditional and low correlation assets, longer term view, and a disciplined and repeatable process through multiple market cycles. The ultimate result is a portfolio that is very diversified and should deliver positive returns in all sorts of market conditions..
Of course, stocks and bonds continue to make up the bulk of the holdings. And, endowment portfolios typically use leverage to free up funds for investing in real assets and alternative investments for diversification and non-correlation.
Examples of real assets include precious metals, energy commodities, and real estate. These tend to perform well in inflationary environments while adding to diversification. Alternative investments include long/short strategies, global macro, managed futures, options, short-selling, and event-driven trades. These also lead to more diversification than a standard portfolio.
Over the last couple of decades, endowment model portfolios have accomplished its goal of blunting volatility while delivering consistent, steady returns. The one drawback is that these portfolios perform poorly during equity bull markets but tend to catch up during the ensuing bear markets.
Finsum: Endowment model portfolios are a relatively new offering to individual investors. These portfolios mimic the style of endowments by investing in stocks, bonds, real assets, and alternative investments with the goal of smoother returns and more diversification.
In an article for InvestmentNews, Bruce Kelley covers how Goldman Sachs and Citigroup are looking to bolster their wealth management divisions. In this sense, these banking giants are behind their peers like Morgan Stanley and UBS who have been quite aggressive in recruiting financial advisors.
Currently, these efforts consist of recruiting experienced advisors, training younger advisors, and acquisitions of thriving practices. One challenge for Citi and Goldman Sachs is that recruitment of advisors is quite competitive, leading to higher prices and more generous terms. Additionally, technology has also given more tools and capabilities to advisors, shrinking the gap between megabanks and smaller practice.
Despite this, Wall Street banks continue to see wealth management as an area of growth. On a recent earnings call, Citigroup CEO Jane Fraser said, ““We see a lot of potential for growth in Asia as we fill in the coverage across the full wealth spectrum there. We will be scaling up in the U.S. by building out the investment offering and cross-selling into our existing and new clients across the country.”
Similarly, Goldman sees its future growth opportunities coming from hiring more advisors. It’s looking to add to its stable of 1,000 financial advisors for wealthy clients in the US and internationally.
Finsum: Advisor recruiting has been heating up over the past decade. Goldman Sachs and Citigroup have fallen behind their peers but are looking to increase their efforts in the coming quarters.
In a piece for ProfessionalPlanner, Michael Collins lays out some pros and cons of investing in alternatives. Overall, he takes a positive view of the asset class as it can boost returns and diversification. Additionally, it can allow investors to take advantage of short-term market inefficiencies which is more difficult through conventional investing and the most popular assets like stocks, bonds, or real estate.
Alternative investments are seeing strong growth over the last decade due to regulatory changes, and technology leading to increased access for private markets. In 2022, the asset class performed particularly well especially relative to stocks and bonds which were both down double-digits.
One challenge is that alternative investments come in many different forms. Some examples include short-selling, a long-short portfolio, global macro, event-driven, arbitrage, private equity, venture capital, and private market investing.
There are some drawbacks to consider. For one, there is less liquidity and transparency especially relative to more popular asset classes. Additionally, many alternative strategies do employ leverage which can be a double-edged sword during periods of economic or monetary stress. Another challenge is that alternative investments typically have higher fees than traditional investments which can erode returns over long periods of time.
Finsum: Alternative investments are seeing a surge in interest due to their strong performance in 2022 and wariness about the economy and traditional asset classes.
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Elana Margulies-Snyderman of EisnerAmper conducted an interview with Liridon Gila, the Co-CIO of Sawgrass Asset Management, to get his thoughts on active equity and fixed income.
Gila starts with a broad view by trying to identify where we are in the economic cycle, and how monetary and fiscal policy will move in reaction which causes its own ripple effects for markets and the economy.
Currently, he sees a challenging environment for risk assets as the odds of a recession continue to rise. Despite this, the Federal Reserve is maintaining its hawkish posture and pulling liquidity from the market. Fiscal policy has been a major driver of the economy over the last couple of years, but this is unlikely to continue to be a tailwind given a divided Congress.
While he is wary of equities, he is more optimistic about fixed income. This is primarily because he expects that inflation has already peaked which would be a healthy tailwind for bonds. Additionally, he sees a normalization of inflation and rates over the next couple of years which means that current yields are quite attractive and unlikely to remain at these lofty levels.
Finsum: Active fixed income is a great strategy for the current market given rising odds of a recession, peaking inflation, and very attractive yields.
Municipal bonds are not exactly the most exciting part of the market. Most investors usually only think of them when there is a crisis or high-profile downgrade.
Yet, in today’s environment it makes sense why there is renewed interest in the category. They are one way that investors can take advantage of higher rates, but they also provide a greater degree of safety given that default risk is much lower.
Todd Rosenblum discusses why the successful resolution of the debt ceiling could be a catalyst for further gains in a blog post for ETFTrends. Prior to the resolution, there was a surge of demand for Treasuries as investors were looking to de-risk their portfolios.
Now, there is outflow from Treasuries and expectations of more weakness given strength in equity markets and increased supply coming online over the next few months. Thus, there is a rotation into other types of fixed income products.
Municipal bonds are one recipient of these outflows especially as they offer tax benefits. Investors also can buy a municipal bond ETF which is a diversified, low-cost way to get exposure to the asset class.
Finsum: Municipal bonds are one way that investors can take advantage of high yields, while also offering tax benefits. They are seeing renewed interest following the debt ceiling resolution.
While ESG investing has boomed over the past decade, there are some drawbacks. One is the lack of clear definition of ESG, and what qualifies an investment to be sufficiently deemed ESG. For instance, some ESG funds have much wider latitude, while others are much more discriminating. In an article for Vettafi, James Comtois discusses why some investors who believe in ESG investing are nevertheless unsatisfied with many ESG investment options.
Another issue is greenwashing which is when a company is deceptive or gives false information about its products or processes. As an example, some ESG funds will contain fossil fuel companies, or companies with a record of pollution.
This also brings up a broader criticism of ESG that asset managers are forcing their views on investors, markets, and companies. For investors who believe in ESG investing but are wary of greenwashing, direct indexing offers a solution.
With direct indexing, any ESG index can be replicated, and any companies can be excluded that merit concern. With direct indexing, investors can ensure that their values are reflected in their investments, while retaining the benefits of investing in a diversified index with low fees.
Finsum: Direct indexing solves one of the major concerns about ESG investing which is that it includes many companies with poor environmental records who are engaged in greenwashing.