Wealth Management
There’s been an ongoing debate about passive strategies vs active strategies in equities and fixed income. While passive strategies have generally proven to outperform in equities, the same is not true for fixed income. In fixed income, active managers have outperformed. Over the last decade, the average active intermediate-term bond fund has outperformed its benchmark, 60% of the time.
According to Guggenheim, this can be partially attributed to risk mitigation strategies which are not available in passive funds. Another factor is that the equity markets are much more efficiently priced than fixed income since there is more price discovery, publicly reported financials, and a smaller universe of securities. Equities are also dominated by market-cap, weighted indices.
Relative to equities, there is much less information about fixed income securities, less liquidity and price discovery, a larger market at $55 trillion vs $44 trillion, and many more securities especially when accounting for different durations and credit ratings. Additionally, less than half of fixed income securities are in the Bloomberg US Aggregate Bond Index (Agg) benchmark. All of these factors mean that there are more opportunities to generate alpha by astute active managers.
Finsum: There is an ongoing debate on whether active or passive is better for fixed income. Here’s why Guggenheim believes that active will outperform against passive.
Exchange-traded funds (ETFs) have revolutionized the asset management landscape over the past decade, and their rise shows no signs of slowing. As Oliver Wyman's 2023 report, "The Renaissance of ETFs," underscores, ETFs have become the single most disruptive trend in the industry. By the end of 2022, total ETF assets under management (AUM) in the US and Europe reached a staggering $6.7 trillion, propelled by a 15% compound annual growth rate (CAGR) since 2010.
While passive ETFs currently dominate the market, holding 59% of assets (at the end of 2022), Oliver Wyman predicts a surge of active strategies. The report posits that the ETF landscape is entering a "next stage of growth," fueled by the emergence of innovative active ETFs.
Several factors contribute to the enduring appeal of ETFs in the US. Compared to mutual funds, ETFs enjoy lower investment minimums, typically lower expense ratios, and attractive tax advantages, making them highly accessible and cost-effective options.
Oliver Wyman projects this momentum to continue, with ETF growth remaining in the 13-18% annual range for the next five years. By 2027, they expect ETF AUM in the US and Europe to reach an impressive $12-$16 trillion, solidifying their position as a powerful force shaping the future of asset management.
Finsum: Active ETFs are poised to fuel the growth of this popular investment vehicle, according to global consultancy Oliver Wyman.
The U.S. Department of Labor's proposed redefinition of what triggers fiduciary status for retirement plan advisors and providers is drawing intense scrutiny from industry professionals, with concerns about its potential impact on information access and plan creation.
Prior to the January 2nd deadline for public comments, prominent figures like Ed Murphy, president and CEO of Empower, have voiced their opposition. A central worry surrounds the chilling effect of the new definition on certain conversations between providers/advisors and plan sponsors/participants. Fear of inadvertently triggering fiduciary status may lead many to withdraw from such communication, effectively cutting off a crucial source of information for those navigating retirement and plan decisions.
Murphy's point, highlighted in a recent planadviser.com article, illustrates this concern: "The proposal would create obstacles to plan creation and could effectively ban many sales conversations between providers and plans or individuals."
However, Tim Hauser, the DOL's deputy assistant secretary for program operations, maintains that the proposal is not meant to regulate routine "hire me" (sales) discussions. He has actively sought industry suggestions on language revisions to better clarify this intent.
Finsum: Defined Contribution professionals share their concerns with the Department of Labor regarding their proposed rule regarding what communication triggers fiduciary status.
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For advisors contemplating switching to a new broker-dealer, carefully evaluating the candidate firms' technology platforms is essential. Their robustness and capabilities can directly influence both advisor success and client trust. Below are three areas to consider.
The Roadmap to Tomorrow: Does the broker-dealer prioritize continuous investment in platform upgrades and new features? Do they have a clear vision for the future of their tech offerings? Knowing where the firm is headed is as essential as knowing where it currently stands.
Growth without Growing Pains: Platforms should facilitate growth, not hinder it. Assess the platform's scalability. Can it handle your growing client base and evolving service needs? Can it be customized to your specific workflows and strategies?
Trusting the Vault: Advisors cannot afford to gamble with client security. Investigate the firms' cybersecurity protocols and data privacy policies. Are they robust and up to date? Do they prioritize data encryption and access control? A single security breach can shatter client trust and an advisor's reputation.
Choosing the right broker-dealer is more than finding the highest paycheck. By evaluating the firms' tech infrastructures, advisors can determine which platform will best enable their growth while safeguarding their client's sensitive data.
Finsum: Select a tech-forward broker-dealer for growth and security in your advisory practice. Evaluate for scalability, innovation, and client data protection.
Gold prices ended the year on a strong note by making all-time highs and finished the year with a 13% gain. Next year, the outlook remains bullish due to expectations that real interest rates will decline as inflation falls and the Fed shifts to a dovish policy, leading to increased demand. JPMorgan has a year-end forecast of $2,300.
Some of the factors that could lead to gold outperforming are the economy being weaker than expected which could lead to more aggressive cuts by the Fed. Additionally, there is a risk that geopolitical tensions could inflame even further whether it’s in the Middle East or the conflict between Russia and Ukraine. Budget deficits in the US remain high for the foreseeable future with another close and contentious presidential election on the horizon.
Another positive catalyst for gold prices is that central banks are net buyers. According to the World Gold Council, they will purchase between 450 and 500 tons in the upcoming year. This is in addition to strong investing demand from ETFs which have seen substantial increases in assets over the past year.
The major risk to the outlook is if the economy remains robust enough so that the Fed can keep the fed funds rate elevated for a longer period of time. During the last 2 ‘soft landings’, gold had a total return of -1.6%, while Treasuries returned 16% and equities were up 33%.
Finsum: Gold prices are flirting with all-time highs. Recent catalysts for strength include geopolitical turmoil and expectations that the Fed is in the midst of a pivot.
It’s an interesting time for fixed income given the recent rally and optimism around inflation falling enough to cause a change in Fed policy. In conversations with clients, Nicholas Bragdon, Lord Abbet’s Associate Investment Strategist, discussed some common themes that are emerging.
The first is that many clients report feeling satisfied with earning 5% returns in deposits and have no desire to make a change. While returns on cash are the highest in decades, the same is true across the fixed income universe even in short-duration assets like short-term corporate debt. Historical data also shows that being overweight in cash leads to long-term underperformance while also leading to reinvestment risk in the event that the Fed does start cutting rates.
Another common concern among clients is that they believe they will have sufficient time to make changes to their portfolio if the Fed does start cutting rates. However, history shows that it’s quite difficult to time these changes in rate policy.
In fact, last year at this time, the consensus was for the economy to fall into a recession in the second-half of the year, leading the Fed to start cutting rates. In reality, markets are too efficient and will have already priced in a bulk of gains by the time the Fed actually starts easing. Thus, investors should consider moving from cash or short-duration fixed income into intermediate or longer-duration to take advantage of the changing environment.
Finsum: Fixed income markets are at an interesting place, following a strong rally to end the year amid anticipation of a change in monetary policy. Here are some common client concerns.