Wealth Management

In an opinion piece for Bloomberg, former NY Fed Chair Bill Dudley shared his thoughts on why there is likely to be more weakness in Treasuries despite increasing indications that inflation is bending lower. 

While longer-term yields have declined as a result, they are starting to creep higher as the economy continues to show momentum with some signs of an acceleration. Hopes that the Fed’s hiking cycle was over seem premature as Fed funds future markets now show hikes at the next two meetings.

Even if the Fed is close to the end, a robust economy means that rates will likely stay elevated at these levels for a prolonged period of time. Further, Dudley sees structurally large deficits, baby boomers spending down retirement accounts, and capital expenditures in renewables and reshoring supply chains as reasons that inflation is likely to linger above the Fed’s 2% target. 

Higher inflation will also erode returns on longer-term Treasuries, leading to higher yields. This has the potential to cause stress to the financial system as we saw with the regional banking crisis especially as Treasuries make up the capital base of so many institutions. However, Dudley sees one silver lining as it could force politicians to address the country’s weakening fiscal situation.


Finsum: Former NY Fed Chair Bill Dudley doesn’t share the market’s optimism that the worst of the inflation surge is over. He sees structurally higher inflation as a headwind for Treasuries. 

 

In a piece for Vettafi’s ETFTrends, James Comtois covers how direct indexing can improve portfolios through increased diversification while also leading to savings on capital gains taxes. The strategy achieves both objectives by helping portfolios from becoming overly concentrated.

Typically, no stock should account for more than 10% of a portfolio due to the risk of a significant decline in price or a bankruptcy filing. Portfolios can become overly concentrated due to a client receiving stock options, early investments in a company, or large holdings of vested stock. 

For clients in these unique situations, the traditional investing strategy would not suffice. Instead, they need a unique solution. Simply selling these positions is not prudent as it could lead to a massive tax bill. 

A better option is direct indexing which lets clients own the actual index holdings in their portfolio. Then, the portfolio can be adjusted to reduce overconcentration. Further, tax losses can be harvested on a regular basis during periods of market volatility. Subsequently, holdings of the overconcentrated position can be sold with the capital gains offset by these harvested losses. 


Finsum: A unique problem for some investors is becoming overconcentrated in one position. Direct indexing offers a solution as it can help reduce the tax bill of selling these positions and lead to more diversification.

 

Following the abysmal performance of stocks and bonds in 2022, it’s understandable that alternative investments have been gaining strong traction over the past year. Moreso when considering that alternatives delivered better returns while reducing volatility. 

In a CNBC article, Kate Dore discusses survey results from the Financial Planning Association that show nearly 30% of advisors are investing in ‘alternatives’ for their clients. These advisors mentioned diversification, lower portfolio risk, and higher returns as major factors in this decision. 

In contrast, 30% of advisors are aware of alternative investments but are electing to not put client funds in these vehicles. Many of these advisors cited higher fees and expenses, lower liquidity, higher borrowing costs, and a lack of transparency as major concerns. Another concern is that clients are not able to easily access these funds in case of an emergency.

There’s a wide disparity in the asset class as it includes a variety of categories like hedge funds, private equity, real estate, commodities, and structured products. Therefore, even more due diligence is required given lower levels of regulation and oversight. 


Finsum: Alternative investments are increasingly being embraced by advisors, especially after their strong performance in 2022. However, some continue to eschew the category due to a variety of concerns.

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