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Recently there has been a high-yield sell-off. No doubt the elevated geopolitical risk, the Argentina default, and weaker-than-expected U.S. jobs report contributed to this, writes BlackRock’s Matthew Tucker, CFA.
In the past few months, BlackRock has been neutral on high yield because it has “offered more income potential than other asset classes” and it remains a “potential source of income in a diversified portfolio.” However, the potential price appreciation is limited. “The recent sell-off is also a good reminder to investors of the potential volatility of the asset class,” writes Tucker.
“Given current yields, investors have to weigh whether they are being paid enough to take on this volatility and the underlying credit risk. Another consideration is whether recent price movements represent a temporary setback for the high yield market or the beginning of a broader re-pricing of corporate bonds. Given overall economic conditions I doubt that there will be any contagion into investment grade debt. For now, I continue to be neutral on high yield.”
Stephen Ellis writes that the “alternative management industry is structurally attractive and generally misunderstood by investors” because it is relatively new and the accounting is rather complex. Additionally he writes that “investors do not fully appreciate the business quality or growth prospects for the biggest and best alternative managers” which have for the most part “greatly” expanded beyond their “initial roots in private equity.”
“The sell side has made some attempts to value the industry using a modified sum-of-the-parts model, but we think that this methodology only adds to the confusion as it deeply undervalues incentive income and relies too heavily on accrued incentive income (which, in our view, is too volatile a metric to be useful).”
Some Bond Investors Are Ignoring A Lurking Risk (AllianceBernstein)
In the current low-rate environment junk bonds have become popular. “But market complacency has caused callable-bond investors to ignore a lurking risk: duration extension in a rising-rate scenario,” writes Ivan Rudolph-Shabinsky at AllianceBernstein Blog. And issuers end up with the “upper hand.”
“Historically, high-yield callable bonds’ yield advantage over government bonds provided a cushion against rising rates. But with this yield advantage diminished today, that cushion is not as large. At the same time, rising interest rates often dictate the decision an issuer makes with its callable bonds.
“If rates and yields rise enough, issuers will likely choose to not call their bonds until a later call date or simply wait until the maturity date to refinance. Investors could be left holding on to bonds they didn’t plan to own so long — bonds now trading at lower prices due to rising yields. And if the bond isn’t called, investors can’t reinvest the proceeds in newer bonds with higher yields. This is known as extension risk.”
Tell Your Clients About The Benefits Of Not Retiring At Age 66 (Financial Planning)
It’s an unpleasant reality, but many clients might now have to work past their expected retirement age, though they might not be considering this possibility. Financial Planning highlights a few key ways that advisers can help clients better understand the circumstances.
Only 50% of U.S. households are expected to maintain their standard of living upon retirement at the age of 66. However, if these same people delay retirement by 4 years, then “86% can expect to enjoy a comfortable retirement.” The longer they work, the more then can save.
If your clients don’t take Social Security immediately, their payout and cost-of-living adjustments will keep growing. Additionally, delaying retirement “means that savings continue to grow.” If your client is still working after the age of 70 and a half, they can “defer 401K withdrawals until April 1st of the year they retire.”
Clients Won’t Listen To Your Advice If Your Tone Is Wrong (The Wall Street Journal)
“If you don’t strike the right tone, your advice won’t be heard no matter how good it is,” Karol Ward, a New York psychotherapist, told the WSJ’s Veronica Dagher. But if you can strike the right tone, client will be “more loyal and apt to refer the advisor’s services to their friends.”
Sometimes advisers use defensive tones when “clients question an advisor’s recommendation,” but a better response would be to “explain the thinking behind the investment” and to express that you understand why the client is concerned.
If advisers believe that they have “offended a client with their tone, it’s best to address it directly and promptly,” and say something like, “I sometimes share too much technical information. I hope that doesn’t come across as condescending — that’s not my intention. My desire is to provide the best level of insight and wisdom to your particular situation.”
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