Wealth Management
Over the last decade, ESG investing has grown increasingly popular among asset managers as a way to evaluate investments and reward corporations for considering environmental, social, and governance factors when making decisions.
Like any trend, there has been a backlash as many conservatives believe that corporations should focus on financial metrics. And, there has been a wave of legislation from Republican governors and state legislatures banning the use of ESG factors by asset managers, managing state funds, when making investment decisions.
Given its prevalence in institutions and rising salience as a political issue, it’s interesting to look at recent Gallup polling which shows that the issue has had little impact on most Americans regardless of their political affiliation.
Even though the issue has entered the political arena in the last couple of years, only 38% of Americans are familiar with the term which is unchanged from 2021, the last time that Gallup conducted a poll on the issue. In addition, 40% of Americans were not aware of ESG at all, while 22% were somewhat familiar with the concept.
Clearly, ESG investing is a big deal for institutions and politicians, it’s failed to break through to the public.
Finsum: ESG investing has grown in prominence among investors and politicians. However, Gallup polling shows that it’s not on the radar of most Americans.
In an article for Financial Planning, Erica Carnevalli discussed some best practices for financial advisors looking to bolster their digital marketing. For advisors looking to market their services especially to younger prospects, having an effective online presence is necessary.
According to Broadridge Financial Solutions, over 40% of advisors have landed clients through social media marketing but only 28% of advisors have an online marketing strategy. Creating your strategy, targeting your ideal client, and ensuring that it aligns with your firms’ value is the first step.
The second step is to find the channel that aligns with your personality. Some options include podcasts, short form videos, or blogging. The key is to make small investments in terms of time and energy at first. Once, something gains traction, then you can double down on that particular approach. Another key is to stay consistent in terms of your output and timing so that you can be a consistent presence on your prospects’ feed.
Finally, advisors need to curate a professional online image that reflects the best version of you. This means keeping your content professional and curating any comments that could detract or distract from your aim.
Finsum: Digital marketing is increasingly necessary for advisors who are looking to grow their practice. Here are some important considerations.
In a blog post for JPMorgan, Nancy Rooney, the Global Head of Managed Solutions, discusses how many investors have been aggressively buying short-duration fixed income given that yields are at their highest levels in decades and economic risks abound. Some of the most prominent ones include a slowing economy that many believe is likely to tip over into a recession, a standoff between Congressional Republicans and the White House over the debt ceiling, a stressed banking system, and a hawkish Fed.
While this move has paid off so far in 2023, Rooney raises some concerns that it may undermine investors’ efforts to reach their financial goals. Having too much allocation to fixed income and being underexposed to equities will hinder portfolio returns in the long-term. In fact, a portfolio solely in Treasuries would have failed to beat inflation over the last 30 years.
She recommends that investors think about equities as the growth engine for their portfolios, while Treasuries are more of a cushioning. This means that investors should consider using periods of fixed income outperformance to regularly rebalance their allocations in order to stay on track towards their financial goals.
Finsum: Fixed income has been a strong performer over the last couple of quarters. Yet, it doesn’t mean that investors should go overboard in increasing exposure to the asset class.
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Until the last couple of years, there were limited opportunities for investors to earn a decent income from thier portfolios. Now due to the Fed’s rate hikes, the situation is much different as there are plenty of options for investors. In AdvisorPerspectives, Mike Smith and Mary Erwin of Russell Investments detail some considerations to reduce risk while optimizing for yield.
During the prior decade when low rates prevailed, many investors were forced to invest in riskier securities in order to generate a decent yield like international bonds, infrastructure bonds, and high-yield bonds. Now, investors can earn similar returns with securities that are much less riskier, but Smith and Erwin believe that investors should continue to have diversified exposure to the asset class given that inflation poses a major threat.
If inflation continues to climb, it reduces the value of these cash flows. Therefore, investors should ensure that their portfolios’ income will grow faster than inflation. Model portfolios can play an important role in this process as it can help build a diversified portfolio and offer exposure to a variety of asset classes with more potential for growth in their income streams.
Finsum: A major challenge for income investors over the next decade is ensuring that inflation doesn’t eat into their portfolios’ income stream.
In an article for WealthManagement, Iraklis Kourtidis shared his persepctive on direct indexing and what it precisely means. He says that there are two components to direct indexing. The first is that it helps an investor create a custom and personalized index. The second is that it can help with portfolio management to ensure that it tracks a specific benchmark.
With direct indexing, investors hold the actual securities themselves in a portfolio rather than an ETF or mutual fund which tracks an index. One advantage of this is that it enables an investor to create their own index. Previously, this wasn’t possible as index investing was only possible through ETFs and mutual funds which follow well-known indexes.
Some investors want the benefits of index investing in terms of diversification and low costs. But, they need greater personalization. One approach is to modify an existing index. Another is to create an index from scratch.
In terms of portfolio management, there are some additional challenges. For one, index holdings need to be constantly rebalanced especially when tax losses are being harvested to offset gains in other parts of the portfolio or when factor scores change.
Finsum: There are two parts of direct indexing, and each is crucial for success. One involves constructing a custom index, and the second is portfolio management.
In an article for ETF.com by Michelle Lodge, she examines whether success in portfolio management is a matter of skill or luck. According to survey results from S&P Dow Jones, there is little connection between good choices made by a manager and portfolio performance.
According to Craig Lazarra, the Director of Index Investment Strategy at S&P Dow Jones, “Our report for year-end 2022 finds little evidence of persistent active management success, despite considering a variety of metrics and lookback periods.”
According to the research, investors are better off with low-cost, diversified ETFs. Additionally, success in terms of picking stocks and ETFs is not repeatable. Additionally even in a poor year for passive funds, 51% of active managers still underperformed their benchmarks in 2022.
Another piece of evidence cited is that managers who outperformed in the first half of the last decade, failed to outperform in the second-half of the decade. The same dynamic appears with active fixed income managers with no indication that success in one year is likely to repeat in subsequent years.
Finsum: Research shows that active fixed income and equity outperformance is unlikely to repeat in following years.