Wealth Management

For decades, Americans have relied on pensions to fund their lifestyles during retirement. This is no longer the case with pensions being phased out in most workplaces. Given today’s high interest rates, it’s worth investigating whether annuities are a sufficient replacement.

 

It’s already clear that many advisors and investors feel the same way given that demand has soared in the last couple of years given the combination of high rates and an uncertain economic outlook. Last year saw a record of $302.9 billion in sales which was a 47% increase from last year. Further, 2023 sales are projected to exceed this figure by a decent margin. Demographics also support continued strength in annuity sales. 2024 is expected to see the largest number of new retirees in history, and around 40% have expressed concern about having sufficient income especially given the jump in inflation. 

 

According to an industry study, 32% of those buying annuities do so to have a guaranteed income stream in retirement. 25% do so to provide protection against their assets losing value. According to the same study, 80% of prospective retirees are interested in annuities, while 82% of recent annuity buyers said they would recommend the product to a friend or family member. 


Finsum: Annuity sales are booming due to high rates and an uncertain economic outlook. With a wave of retirees coming, they will play an important role in plugging the gap left by the exodus of pensions.

 

Most of the attention and chatter in the energy sector have been focused on issues like the price of oil, a potential renaissance for nuclear energy, and whether electric vehicles (EV) will displace gas-powered vehicles. 

However, the proliferation of solar energy is less discussed but in many ways, it could be more impactful in the long-term. According to the Solar Energy Industries Association, there were an additional 12 gigawatts of installations in the first-half of 2023. This is a 20% increase from last year’s first-half.

A major factor is the Inflation Reduction Act (IRA) which boosted subsidies for home and corporate solar projects. It’s also boosting the domestic production of solar panels. In 2022, there was production of 10.6 gigawatts of domestic capacity, but this is projected to increase to 108.5 gigawatts by 2026. It’s also notable that capital expenditures in the solar industry were bigger than that of oil & gas last year. 

According to the industry group, the solar industry in the US is projected to grow 15% annually. It sees the full-scale benefits of the IRA to start hitting the industry by late 2024. In terms of challenges, it identifies interconnection of grids and cost-prohibitive batteries as bottlenecks for future growth. 


Finsum: A trend in the energy sector is the boom in solar due to lower costs and the Inflation Reduction Act. In particular, domestic manufacturing is a major beneficiary.. 

 

In theory, active fixed income offers the best of both worlds. It has all the inherent benefits of an ETF structure leading to more liquidity, transparency, and lower costs, but it still gives managers flexibility to find the best opportunities in the fixed income space. 

 

The category is seeing substantial growth in terms of inflows and new issues. Institutions and advisors are becoming increasingly comfortable with the asset class. Additionally, it’s well suited for this particular moment given the uncertainty about the Fed and the economy’s direction which should create more opportunities for alpha for active managers. 

 

The latest mega-institutions to jump on the trend is the Bank of Japan. The central bank is shifting $62 billion of passively managed fixed income into active management. It believes this will help it finetune the risk profile of their holdings. It’s also consistent with its recent policy to gradually let yields rise in an effort to combat inflation. 

 

In fact, this change in monetary policy is also contributing to bond market volatility. And, this jump in volatility is what is leading to opportunities for active managers that the Bank of Japan is keen to capitalize upon. The Bank of Japan is considered a trailblazer, so it will be interesting to see if other central banks follow suit and increase allocations to active fixed income. 


Finsum: The Bank of Japan is converting some of its passive fixed income holdings into active fixed income. Find out why and whether other central banks will follow.

 

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