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Active managers have become ‘the periphery’ as passive funds have been overtaking active funds. The most likely way that active managers can reverse their “dire future” would be to “dodge the puncture of a market bubble,” writes John Rekenthaler.
For active managers to benefit during a market bubble, it must occur within a market segment. “While a market crash is required to pop the bubble and release active managers’ period of outperformance, a crash alone is not a sufficient condition.” In 2008, active management’s fortunes were “damaged rather than improved” by the plunge.
“The other requirement, of course, is that active funds have a dramatic underweighting in that segment. It does no good if they own the bubble.” And the problem with that, is “today’s stock fund managers are not positioned much differently from the overall marketplace,” according to Rekenthaler. “If a market crash drags down passive funds, active funds surely will not be far behind.”
“There is, however, a possibility for bond-fund managers. In aggregate, taxable-bond managers hold much fewer Treasuries and government-agency bonds than does the Barclays U.S. Aggregate Bond Index, the most common benchmark used for taxable-bond funds,” he writes. “…If interest rates were to rise dramatically, thereby decimating Treasuries, active taxable-bond managers might regain the initiative. “
HighTower Recruits An $US800 Million Merrill Advisor Team (Financial Planning)
A Merrill Lynch team with $US800 million in assets under management (AUM) is joining HighTower Partnership. The newly recruited team will “represent the firm’s fourth office in Florida,” Andrew Welsch at Financial Planning reports.
Three of the advisors — Pamela Lynn Abraham, Jack Thomas, and Trevos Swartz — join the firm as partners, and will have an equity stake in their new employer. An additional advisor, Mathew Verrengia, senior registered associate Benita Alstatt, an client services associate Tiffany Likness also made the move. Abraham had been at Merrill Lynch her entire 33-year career — making this her first ever switch.
Hiring Millennials Is A Long Term Investment In The Company (The Wall Street Journal)
Jim Meehan managing partner at 1847Financial partially credits a threefold increase in production from 2011 to 2013, to the almost 40 millennial financial advisors he hired. He states that the hire was merely “smart business” because millennials bring “energy and enthusiasm to the business”.
Additionally firms that don’t hire millennials are not investing in the future. “Many advisors don’t have a succession plan,” he told Veronica Dagher at the WSJ. “What do they think is going to happen to all of their clients and their business?” He’s even started an intern program with the hopes of “hiring some of those interns when they graduate”.
However, the downside of millennial hires is that sometimes older clients don’t take them seriously. To combat this problem and to help the millennials gain credibility, Meehan puts them on teams with more seasoned advisors.
Soaring Profit Margins Aren’t A Normal Level Of Profitability — They’re A Peak (AllianceBernstein)
Net profit margins have gone from 4.6% in March 2009 to 9.8% at the end of Q1 2014. “The problem is that, historically, margins like these have marked a peak rather than a normal level of profitability,” writes James T. Tierney, Jr., at AllianceBernstein. “And the factors that have driven margin expansion to date are unlikely to persist.”
Labour efficiencies, lower depreciation and amortization, and reduced interest expense, all factors that have driven margin expansion won’t last long.
He says that, firstly, “the labour market is tighter, which could introduce higher wage inflation. While technology will always be a persistent pressure on labour, with employee share of revenue at very low levels, it may be much harder for companies to tighten wage costs further.” Secondly, amortization and depreciation have declined for two reasons: companies are now more conservative about allocating capital; and “certain accounting rules have changed.” Thirdly, “companies can’t really rely on improvements to financing to help boost margins.”
“Investors should recalibrate their expectations to the new profitability reality. It’s clearly going to be much harder to rely on margin expansion to deliver double-digit earnings growth in the quarters ahead, so revenue growth will be much more important to earnings growth. In this environment, the best defence to slowing margin gains is to identify companies that can beat expectations by delivering secular revenue growth.”
ETFs have been some of the most important investment innovations of the past 25 years. But the “dark side of innovation is proliferation”, according to Vanguard CEO Bill McNabb. “We now see some ETF providers thinly slicing market and country exposures. Others are basing products on back-tested data, bringing the market to only those that ‘promise to outperform’ broad markets.”
Additionally, Vanguard has doubts over whether this “would ultimately benefit investors.” Another problem with ETFs is the “issue of capacity constraints with traditional active mutual funds”, according to McNabb. He writes: “when an Vanguard active fund reaches a certain asset level or is attracting too much ‘hot money’, we close the fund to new investors.” But doing that with active ETFs is difficult.
“Our research shows that after these ETFs are launched, most actually underperform the market.1 It’s hard to have the discipline to use ETFs for broad asset allocation and not get caught up in the product fads of the day. But it’s the right thing for investors,” according to McNabb.
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