Displaying items by tag: bonds

One of the big stories of 2022 was the failure of the 60/40 portfolio. The 40% allocation to bonds is supposed to help protect investors during downturns, but during markets like last year where both stock and bonds fell, the portfolio failed. Now, strategists are looking for ways to improve the 60/40 portfolio. In a recent panel discussion at the New York Stock Exchange, industry experts spoke about “The Rise of Alternatives and the New 60/40 Portfolio.” Asset management professionals and advisers talked about methods to diversify and target new sources of income for retirement savers. Kimberly Ann Flynn, the managing director of XA Investments, said “An available alternative is a mutual fund wrap with added investments such as managed futures and commodity futures, which exist in the category of liquid alternatives.” She added, “I think with now this big push again looking at 60/40, it’s just diversification away from U.S. equity. I think some of these liquid alternatives are going to see a resurgence. In terms of performance, long-short equity performed well, on a relative basis and absolute basis. Some of the managed futures strategies performed really well.” Brian Chiappinelli, a Managing Director at Cambridge Associates, said that another alternative gaining momentum is the collective investment trust (CIT). He stated that “CITs have more leeway to add alternatives that are customized to a particular employee demographic.”

Finsum: After the blood bath in 2022, asset managers and advisors are looking for new ways to improve the 60/40 portfolio, including adding alternatives such as managed futures, commodity futures, or utilizing a CIT.

Last year was a tough year for bond investors, even pension funds. With the Bloomberg U.S. Aggregate Bond index down 14.6%, funds had to look elsewhere to bolster returns. According to a recent Pensions & Investments survey, a significant portion of defined benefit plans reported smaller bond portfolios as of September 30th, with many dropping more than 20%. For instance, the $430.4 billion California Public Employees' Retirement System (CalPERS) saw its U.S. fixed-income exposure drop 38.3% in the year ending on September 30th to $77.2 billion. In addition, the $288.6 billion California State Teachers' Retirement System saw its domestic bond exposure fall 12.9% in the 12 months ending on September 30th to $41.3 billion. With pension funds not wanting a repeat of 2022, many are turning to active bond strategies. For example, CalPERS is looking toward active management to turn things around. The pension fund's active and passive fixed-income exposure amounted to $77.4 billion and -$206 million as of September 30th, 2022, compared to $91.6 billion and $33.6 billion a year earlier. Arnold Phillips, managing investment director for global fixed income at the pension fund, noted that the current market could provide "opportunities to tactically deploy assets when managed through an active risk governance model," which could help turn performance around.

Finsum:With pension funds seeing their bond exposures plummet last year, many are turning to active fixed-income strategies this year in the hope of turning performance around.

After a tough year in the equity markets, this year is shaping up to be a better year for investors as the S&P 500 is up over 7% through Monday’s close. This is happening amid numerous recession predictions across Wall Street. The rise in the stock market this year can be attributed to the growing sentiment that the worst is over when it comes to inflation and rising interest rates. In fact, a gauge of future volatility in the U.S. bond that tracks interest-rate turbulence is now showing an increasingly encouraging trend that is supporting the optimism in the market. The ICE BofA MOVE Index is extending a slide that started in October. It has now fallen to lows not seen since March when the Fed started its aggressive interest-rate increases. The index continued to fall after the Fed’s latest meeting on Wednesday, where according to billionaire investor Jeffrey Gundlach, Fed Chair Jerome Powell “didn't fight back in his speech Wednesday against market expectations that the Fed will soften its rate policy later this year.” The Fed raised benchmark borrowing costs by only 25 basis points, the smallest increase since last March. Over the past year, the trajectory of the S&P 500 has moved inversely to the MOVE index, showing the market's sensitivity to the interest-rate outlook.

Finsum:The stock market has rebounded this year as the ICE BofA MOVE Index, which measures bond volatility, has been sliding since October.

Last month, fixed-income ETFs saw more inflows than equity ETFs. Elisabeth Kashner, director of global fund analytics at FactSet said in a phone interview with MarketWatch that “You don’t see that every day. That’s kind of a big deal.” According to Kashner, fixed-income ETFs brought in around $23.7 billion in January, while equity ETFs raked in a total of $22.9 billion. In 2022, rates rose quickly amid sky-high inflation. Due to this, investors embraced more “targeted products” than broad fixed-income funds, according to Kashner. This continued into January as the Schwab Short-Term U.S. Treasury ETF (SCHO) and the iShares 20+ Year Treasury Bond ETF (TLT0) were among the top 10 funds for inflows. Kashner noted that the Schwab Short-Term U.S. Treasury ETF “is what you buy defensively if you want to be in high-quality” fixed income “but you don’t want too much duration exposure,” due to concern about rising rates. She also said that the “iShares 20+ Year Treasury Bond ETF, which provides duration exposure, tends to attract investors worried about a recession.” Other fixed-income ETFs that saw strong inflows last month include the iShares JP Morgan USD Emerging Markets Bond ETF (EMB) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), according to FactSet data.

Finsum:Fixed-income ETF inflows outpaced equity ETF inflows last month as investors continued to embrace more targeted fixed-income products amid high inflation.

While many investors kept cash on the sidelines last year, that should change this year, according to Goldman Sachs. Ashish Shah, chief investment officer of public markets at Goldman Sachs says “A lot of investors last year were frozen because of the volatility and uncertainty. As that uncertainty narrows, it’s really important for investors to take action.” Shah believes the Fed is closer to the end of the rate-hike cycle than it is to the beginning and rising inflation has begun to slow. With that in mind, Goldman is suggesting that now is the time to add duration to a portfolio through fixed income. Shah says “Cash in the portfolio of investors is still incredibly high. What we’re advocating [is that investors should] come out of cash in the bank and go into the market and capture some of this yield.” He added that while bonds are generating income, they also can rally even further than they already have. However, selection matters more now than it used to. According to Shah, investment-grade credit and municipal bonds with longer durations could be effective in achieving portfolio goals. He also noted that lower-quality muni bonds also have room to generate attractive yields and they’re tax-exempt.

Finsum:Goldman Sachs CIO Ashish Shah believes that now is the time to put cash to work in investment grade credit and municipal bonds as the Fed is nearing the end of its tightening cycle and inflation is starting to slow.