FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors.
Why Relative Value is Trumping Risk Aversion (Blackrock Blog)
The stock market has seen a “less-than-positive” tone in the last few weeks because of rising geopolitical tensions. But, trading has not been “all about” risk aversion — and stocks have not followed the expected “risk-off” plan.
Safe haven assets have struggled while higher-risk assets like frontier and emerging market stocks have done relatively well. “The seeming disconnect between investor angst — evidenced by a sideways stock market, rising volatility and selling of high yield bonds — and a proclivity for more exotic markets can be reconciled fairly simply: investors have a newfound interest in relative value,” writes Russ Koesterich at BlackRock Blog.
“At a time when most of the major asset classes look somewhere between fully valued and expensive, investors are being forced to look further afield in search of value and yield. …EM Asia is illustrative of this point. This market segment has benefited from stabilisation in the Chinese economy and positive election results in India, but there is another reason investors have been attracted to this part of the world: It’s relatively cheap. While EM Asia valuations — as measured by the MSCI Emerging Markets Asia Index — are still above the bargain basement levels seen in 2008, they trade at a 30% discount to developed markets.”
A Third Opportunity Has Emerged For Bond Investors Looking To Boost Returns (Alliance Bernstein)
“Bond investors have historically enhanced their returns by taking on more interest-rate or credit risk. Today, a third opportunity is emerging for investors: the liquidity premium,” writes Douglas Peebles at AllianceBernstein Blog. Illiquid investment opportunities are having a moment. They’re growing, and “provide investors with a healthy yield premium in return for giving up the ability to quickly convert their assets to cash,” according to Peebles.
A couple of catalysts are creating illiquid investment opportunities. First, there’s credit disintermediation. “Both midsized and large banks have faced more cost pressure or capital requirements, making it challenging for them to participate in some asset classes. As banks step back from certain lending activities, borrowers still need access to credit, opening the door to “private credit” opportunities for nonbank lenders. We’ve seen this trend accelerating for banks in the US and Europe in the past few years, in the aftermath of the financial crisis. ” Credit disintermediation has created illiquidity premiums in the form of middle-market loans and risk sharing transactions.
Declining secondary-market liquidity is acting as another catalyst. “Regulatory changes have affected banks and their fixed-income market-making abilities, reducing liquidity in secondary markets. Continued anxiety from the global financial crisis has also reduced liquidity for some fixed-income securities in secondary markets.” Closed-end funds and municipal bonds are two areas where investors are being paid for declining secondary-market liquidity.
Voices: TIm McGrath, On Confronting Clients Who Spend Carelessly (Wall Street Journal)
Often high net worth clients can be irresponsible with how they spend their money. But advisors need to be willing to be the bad guy writes Tim McGrath, managing partner at Riverpoint Wealth Management, in a WSJ column.
“Unlike a person who is suddenly flush with cash and goes on a spending spree, this behaviour tends to take root over time. Advisers have to take note and take action, because that kind of spending can ultimately threaten to derail the client’s financial planning.” Clients run into problems when “major, one time purchases” suddenly become “become regular expenses. It could be vacations for extended family members, gifts or loans to friends, or helping out children with the purchase of a home. These expenses start compounding very quickly and can ultimately jeopardize the ability of a client–even one in a great financial situation–to maintain his or her standard of living through retirement.”
It’s hard for people to change the habits that they have grown comfortable with, and that’s why it’s important to be a “proactive as an adviser and to monitor and address spending with clients regularly”. It’s important to confront clients about habits if they are becoming an issue.
The Securities and Exchange Commission (SEC) is reviewing whether conflicts of interest led JPMorgan Chase to sell certain investment products to individual clients. The review is at an early stage. And the Office of the Comptroller of the Currency is reported to have conducted a similar probe into whether JPMorgan led private-banking clients into its own products.
“We manage a variety of portfolios based on a client’s investment objectives, and the mix of solutions varies, is dynamic and transparent,” Darin Oduyoye, a JPMorgan spokesman told Michael Moore at Bloomberg. “Our clients have countless options in selecting financial providers. They come to JPMorgan because of our long-term investments track record and the depth and breadth of our platform.”
“When we hear about alternatively weighted indexes including those that are marketed under the tag name, Smart Beta, we like to remind advisors and institutional investors that we simply think that these are forms of active management,” says Jim Rowley at Vanguard. “And I say that for two reasons. Number one is the weighting mechanism used by alternatively weighted indexes. If you think about a cap-weighted index, a cap-weighted index is the consensus valuation of all investors and all factors all around the globe.”
“…The second way that we think about this is if you read about the strategy or the intent of these alternatively weighted indexes, many of them are designed or they have put forth the strategy that they’re trying to outperform an index. And quite simply, in investing, if we think about a strategy that is designed to outperform a certain index, that would be another form of active management.”
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