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.

Last year was a dismal year for fixed-income funds as bonds had their worst year on record. But this year, bonds are regaining steam partly due to an inverted yield curve. Fixed-income ETFs saw roughly $26 billion in inflows last month. Todd Rosenbluth, head of research at VettaFi, told Mike Santoli on CNBC’s “ETF Edge” that “There’s now income within the fixed income ETFs that are available. We’ve seen higher-quality investment-grade corporate bond ETFs. We’ve seen high-yield fixed-income ETFs see inflows this year, as well as some of the safer products.” For example, the 10-year Treasury yield was trading at 3.759%, while the yield on the 2-year Treasury rose to 4.644% on Wednesday. In addition, the yield on the 6-month Treasury hit 5.022%, its highest level since July 2007. With yields at their highest in decades and lofty stock valuations, investors are looking for areas of strength in the market. In the same ETF Edge segment, James McNerny, portfolio manager at J.P. Morgan Asset Management, added “When we break down the flows that we’re seeing, we’re seeing flows into higher-quality, longer-duration products, and credit products on the front end of the curve. Those have been the lion’s share of the majority of the flows that we’ve seen.” Jerome Schneider, managing director at Pimco, told CNBC “That fixed income funds are gaining popularity because they offer investors attractive yields in an uncertain economic environment.”

Finsum:With yields at their highest in decades, bond ETFs are seeing strong inflows as investors seek income in an uncertain economic environment.

FINRA recently announced that it has fined and censured a New York firm for violations of some of the basic written and supervisory requirements of Regulation Best Interest. The violations date back to June 2020 when the advice standards went into effect. The regulatory body charged the Long Island Financial Group, a five-person broker-dealer based in Roslyn, N.Y., with failure to supervise and “to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance” with the regulation that requires advisors to put customers’ best interests ahead of their own financial gain. The firm settled the charges for a $35,000 fine, without admitting or denying guilt. The broker-dealer also received a public censure and is required to certify that it has remedied the compliance failures within 90 days. According to FINRA, Long Island Financial Group also “failed to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with Reg BI.” In addition, the firm also failed to deliver to its clients Form CRS, the customer relationship summary that broker-dealer clients and prospects are supposed to receive, explaining the firm’s service offerings, products, fees, and conflicts of interest.

Finsum:A small NY firm was fined and censured by FINRA for failure to supervise, maintain, and enforce policies and procedures reasonably designed to achieve compliance with Reg BI.

J.P. Morgan Advisors continues to boost its advisor headcount with the latest addition of a Boston-based Merrill Lynch team that generates $2 million in revenue. The team is led by Andrew Parvey and Maureen Wilson who oversee $200 million in client assets. They moved to J.P. Morgan along with support staffers Victoria Steele and Ko Dong. Parve started his career at Olde Discount Corp. in 1996 and also worked at Gruntal & Co., and Citigroup’s Smith Barney before joining Merrill in 2008. Wilson started her career as a personal banker at Bank of America in 2003, and worked at Chase between 2005 and 2007, before restarting her brokerage career in 2015 at Merrill. They will report to Rick Penafiel, regional director for Boston, Miami, and Palm Beach. This marks the second Merrill team to join J.P. Morgan Advisors in as many months. Another team led by Marc Karstaedt in New York City joined in January. The Advisors unit, which JPMorgan acquired from Bear Stearns during the financial crisis, has around 450 advisors. In July 2021, the group announced a plan to double its headcount over the next five to seven years. J.P. Morgan ended last year with 5,029 total advisors, up 6% from the prior year.

Finsum:J.P. Morgan lured away its second Merrill Lynch team in as many months in a bid to boost its advisor headcount.

For decades, the wealthy have been able to see huge tax savings. Over one hundred years ago, investors could take tax deductions on wash sales, which involved selling a security at a loss and then buying back the same security. While Congress outlawed that technique in 1921, investment firms have continued to help billionaires save on taxes through other techniques such as tax-loss harvesting, which allows an investor to sell an investment for a loss and replace it with a reasonably similar investment. Direct indexing, which continues to gain steam among advisors, provides the perfect strategy to employ tax-loss harvesting. In a recent article, ProPublica authors Paul Kiel and Jeff Ernsthausen reported on the tax savings techniques of billionaires. The authors were able to reconstruct the tax-loss strategies of some of the nation’s wealthiest people using IRS data. For instance, they estimated that from 2014 through 2018, Goldman Sachs was able to generate tax savings of $138 million for Steve Ballmer, former CEO of Microsoft and current owner of the Los Angeles Clippers, without changing his investment portfolio in any meaningful way. In the year 2017, Ballmer’s direct indexing accounts posted over $100 million in tax losses through 15 loss-harvesting transactions, while the performance of the indexes it tracked, was way up. Tax records also show that Goldman Sachs routinely made trades for direct-indexing clients like Ballmer.

Finsum:Based on recent reporting by ProPublica, billionaires such as Steve Ballmer have been able to save billions through tax-loss harvesting in direct indexing accounts.