Market volatility fuels demand for diversification

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Fixed income securities have long been a core component of bank client portfolios, given their low volatility, consistent income stream and uncorrelated returns to the stock market.

Given the ongoing pandemic, bank advisors have shown stronger demand for products that offer protection against short-term price volatility and broader long-term diversification benefits.

As such, asset managers who can help them navigate complex fixed income markets and demonstrate a consistent track record of helping clients generate income and reduce overall portfolio volatility will benefit from current market environment, says Cerulli Associates.

Alternative asset classes are also becoming more attractive to bank advisers, with many planning to increase their allocations to private equity, hedge funds and non-traded real estate investment trusts over the next two years.

ETF performance

The uncertain outlook for equity and bond markets in the coming years has benefited both private equity and hedge funds, which wealthy investors have long relied on to generate outperformance and diversify exposure. to equity market risk.

Bank advisers are also increasingly interested in exchange-traded funds (ETFs). According to the latest edition of Cerulli Edge, nearly three-quarters (71%) of banking advisors say performance is the most important factor when selecting ETFs, followed by spend rate (62%) and daily trading volume. transactions (57%).

“Given the inherent advantages of the ETF vehicle in terms of scalability, low cost and tax efficiency, they have become a staple for client portfolios on banks’ advisory platforms,” ​​says Chayce Horton, research analyst at Cerulli.

A growing number of advisors are incorporating active ETFs into their fixed income allocations and in doing so, reducing overall portfolio costs for their clients compared to using individual bonds.

“As banking advisory teams demonstrate continued demand, there is a clear opportunity for asset managers to better educate advisors on the benefits of active ETFs within their clients’ portfolios,” says Horton.

Long term portfolios

With the trajectory of the pandemic and the uncertain global market, there remains an opportunity for active managers to reassert themselves and outperform passive index strategies.

“While certain market conditions will sometimes cause some active managers to underperform, the majority of bank advisers have designed long-term portfolios that combine both active and passive aspects,” he says.

“As such, asset managers must remain product and vehicle independent and be prepared to position both actively managed funds and passive strategies in bank head offices across a wide range of asset classes. assets and portfolio objectives.”

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