Fixed Income
Model Portfolios
Fixed Income Sector Thriving
2024 has proven to be a year of relentless volatility for fixed income, given mixed signals about
inflation, the economy, and monetary policy. However, there are plenty of opportunities to make
money amid these conditions.
A consequence of high rates is that the US government is expected to pay more than $1 trillion
in interest to bondholders this year, which is more than double the average from the previous
decade. Currently, all Treasury securities are yielding more than 4%, and due to elevated rates,
investors have a higher margin of safety. This means that fixed income is once again a source
of meaningful income for investors and serves as a counterweight to equities.
Deal flow also remains robust, which is a positive for underwriters and sponsors. According to
Bloomberg, bankers who underwrite bond offerings are expected to see a 25% increase in
bonuses. In terms of sales and trading, bonuses are expected to rise by 20%, compared to an
increase of 5% to 15% for equities.
Another trend in fixed income is the electronification of the bond market. Traditionally, bond
trading has been done over the phone or through banks, which has resulted in illiquidity and
less price discovery.
Now, volume is moving to electronic bond exchanges, which is benefiting market makers like
Citadel Securities and Jane Street. These firms are now making markets in government and
corporate bonds. It’s estimated that 42% of investment-grade debt trades were electronic last
year, compared to 31% in 2021.
Finsum: Entering the year, many were confident that Fed rate cuts would fuel a bull market in
bonds. This has failed to materialize, but there have been opportunities in fixed income.
Category: Bonds: Total Market
Keywords: #fixed income; #treasuries; #bonds; #rates; #income; #corporate credit;
Model Portfolios Benefit Advisors, Asset Managers
Assets in model portfolios grew by nearly 50% over the last 2 years. By fully or partially
outsourcing the investment management function, it frees up more time for advisors to focus on
building their practice, client service, financial planning, and prospecting. According to a recent
survey from Cerulli, 12% of advisors are using model portfolios primarily, with 22% using a
hybrid approach.
In addition to benefiting advisors, model portfolios have become a major distribution channel for
asset managers such as Blackrock. Among asset managers, Blackrock has the most assets in
model portfolios at $84 billion. Salim Ramji, Blackrock’s head of index investments, sees model
portfolio assets exceeding $10 trillion within the next 5 years, more than doubling from $4.2
trillion currently. Model portfolios comprised 50% of flows from US investors into iShares ETFs
last year.
WisdomTree is another major beneficiary of the boom in model portfolios. Last year, the
company saw a 100% increase in the number of advisors using its model and had asset growth
of 40%. It sees model portfolios as a ‘key growth driver’ for the firm in the coming years.
As model portfolios become a larger presence in wealth management, there will be large shifts
of flows in and out of various ETFs depending on decisions made by asset managers. For
instance, JPMorgan found that ETFs that were held in its model portfolios had significantly more
inflows than ETFs not in model portfolios, at $80 billion vs. $30 billion.
Finsum: Model portfolios are forecast to exceed $10 trillion in assets within the next 5 years.
They are becoming increasingly integral for advisors and asset managers.
Category: Portfolio Construction
Keywords: #model portfolio; #ETFs; #asset management; #Blackrock; #JPMorgan; #inflows;
