Past performance is no guarantee of future results. That’s an often repeated phrase in investing. Investors, however, seem to be of a different mind. In a TIAA-CREF survey, 36 percent of respondents pegged one-year performance as the most important indicator of an investment’s return. Forty-seven percent of investors said they’d chosen mutual fundsbased on the preceding year’s performance, without looking at historical returns.
News Mentions & Press Releases
Some investing pitches target your inner optimist, with a promise of “outperformance” or a hot stock tip. But others address the pessimist in your soul: Something’s bound to go wrong, they whisper, and we can keep you safe.
You can expect the latter message to grow louder in the months ahead; the longer the stock market’s bull run continues, the more skeptics suspect a correction is due. And the loudest voices in the pessimist choir may belong to managers of hedge funds. Those funds, which rely on sometimes sophisticated strategies to protect clients’ portfolios, lost significantly less than stocks and mutual funds did in the last two U.S. bear markets. That, plus impressive short-term returns from a few celebrity managers, has helped them attract truckloads of cash; hedge fund assets now top $3 trillion.
The typical hedge fund charges annual fees that can top 1.5% of customers’ assets, plus up to 20% of profits. That hefty premium has created an opening for new exchange-traded funds that offer similar ritzy strategies, but at cheapskate prices. These me-too funds use a grab bag of investments to emulate hedge fund tactics. They’re unusually complicated for ETFs—and with about $3 billion in assets, they’re a tiny segment of the market. But in an era when the performance of low-fee funds is luring growing numbers of price-conscious investors, they could attract a lot of new money in a downturn.
In the sharply competitive exchange-traded fund arena, fund providers have been relentlessly driving down fees in a bid to undercut one another on price.
And though experts acknowledge that a cost comparison must be a principal consideration in selecting a fund, it isn’t the only determining factor.
CLS Investments, a third-party money manager focused on ETFs in Omaha, Nebraska, just rolled out a suite of bundled ETF products that aim to pair returns with a client’s risk profile, offering exposure to smart-beta and active funds, as well as small positions in more niche offerings.
The firm undertakes what it calls a risk budgeting process that involves both a questionnaire to evaluate a client’s risk tolerance, as well as an evaluation of the risk characteristics of a given ETF, says Grant Engelbart, portfolio manager at CLS Investments.
It is hard to find an asset class that has seen more explosive growth and diversification in recent years than exchange-traded funds, including a proliferation of exotic products that track highly niche indexes.
“It’s definitely become a more and more complicated process as time goes on, because they’re just so many options in this space,” says Dana D’Auria, director of research at Symmetry Partners, a registered investment advisor based in Glastonbury, Connecticut.
Those options run the gamut from low-cost, plain-vanilla funds that track indexes such as the S&P 500 to far more exotic, niche-focused ETFs that might be entirely concentrated in an individual country, a certain commodity, or a set of companies in a particular sector.
D’Auria is highly cautious about exotic ETFs, warning that “they might be a fit not for an investor but a speculator” and that therefore clients should heed the iron rule of gambling.
Emerging market (EM) equities are having a great year. As of Oct. 13, the MSCI Emerging Market Index is up 33%. These returns are prompting more investors to get interested in emerging markets, but is already it too late for ETF investors?
Relative Valuations
At CLS, we believe emerging market stocks are still attractive, as they remain relatively cheap. For instance, the chart below examines a combination of valuation metrics (price-to-sales, price-to-book, price-to-cash flow and price-to-earnings) since 2001, and shows that emerging markets on average (represented by the red line) trade at a 15% discount to the overall world stock market. In other words, emerging market equities are typically inexpensive.
Currently, even though emerging markets have had an incredible run, they remain undervalued, and are trading at a 23% discount. In other words, despite the recent markup in prices, they are still on sale.
Financial advisors work hard. Financial security and prosperity are two of the biggest stress factors that people face in their day-to-day lives. Finances can cause emotional, marital and psychological challenges that confound even the most successful individuals.
As people’s lives progress, they often get more complicated. Careers grow. Relationships form and develop. Children enter the picture. Children grow up. Marriages end, and begin anew. The number of variables one must take into account when managing his or her financial life, as well as advising on one, are practically limitless. Enter the advisor.
Financial advisors are to a person’s financial life what a physician is to a person’s physical life. The difference is that when a doctor advises you to stop smoking or face certain death, or that you need to cut back on the Five Guys burgers before your heart bursts out of your chest, there’s a very compelling reason to heed that advice – the grim reaper. The more stubborn patients may not heed the advice regardless, but they certainly have no room to argue with their physician. The financial advisor does not have this luxury.
Despite the criticality of personal finances for our lives and futures, research shows a pervasive financial illiteracy at even a basic level of knowledge for most people. Now, the same holds true with regard to medicine, but you don’t see people openly challenging their doctor’s assertions, thinking they could do a better job, or questioning their methodology at every turn.
Last week, Japanese Prime Minister Shinzo Abe’s Liberal Democratic Party (LDP) and its coalition partners scored a convincing win that will maintain a large majority in both houses of parliament.
This should extend the life span of “Abenomics,” including the Bank of Japan’s mega stimulus, and help Japan’s economic prospects, according to US iShares Investment Strategist Tushar Yadava. While Japan is the largest of the developed international markets, exposure in popular ETFs can differ.
Developed and diversified international equity ETFs have been very popular in 2017, with the iShares Core MSCI EAFE (IEFA) and the Vanguard FTSE Developed Markets (VEA) gathering the second-most ($19 billion net inflows) and third-most ($16 billion) new money year-to-date through Oct. 27, according to ETF.com data.
An additional $9.5 billion and $3.6 billion flowed into the iShares MSCI EAFE (EFA) and the Schwab International Equity ETF (SCHF), respectively, this year. The performance success of these ETFs has been aided by a rebound in Japanese equities.
Basing your investment strategy on past performance (especially recent performance) can easily backfire. “Annualized rates of return mask a lot of the variability that investments experience,” says Eric Meermann, certified financial planner and vice president of Palisades Hudson Financial Group in Stamford, Connecticut. “Assets that have performed well may not continue to do so,” creating misleading impressions for investors.
In fact, assets that have performed the best in recent years may be the ones poised for a downturn, Meermann says. They may be so overvalued that they’ve become riskier choices.
Relying on recency bias to guide investment decisions can be particularly dangerous when the market is on an upswing, says Colin Richards, founder and president of Lord and Richards in Highlands Ranch, Colorado. Investors move into the market hoping to capitalize on rising prices, even when signs may be pointing to an impending correction. That behavior, Richards says, can lead investors down a precarious path.
If the race to zero is well underway when it comes to charging for asset management, the race to zero when it comes to creating asset allocation strategies is right there with it. On Tuesday, exchange traded fund strategist CLS Investments launched eight new “Smart ETF” models, which helps advisors build portfolios with a combination of factor-based ETFs from five different fund managers, without charging a strategist fee.
The model portfolios are composed of “smart beta” or factor-tilted ETFs, alongside smaller satellite positions in ETFs focusing on specific sectors, countries and alternative assets. According to CLS, the models are designed to focus on total return proportionate to an investors’ risk tolerance.
The models will emphasize the use of factor-based funds, and CEO Ryan Beach said the majority of positions are multi-factor ETFs with single-factor ETFs used to tilt portfolios towards factors CLS deems attractive.
“We believe that provides a higher degree of flexibility than any one multi-factor ETF especially as market conditions change,” Beach said.
First of its kind, disruptive models utilize products from five ETF issuers at zero-percent strategist fee.
CLS Investments, LLC (“CLS”), a third-party money manager and leading manager of exchange traded fund (“ETF”) portfolios, launched Smart ETF Models, which utilize products from five ETF providers at a zero-percent strategist fee. CLS partnered with Deutsche Asset Management, First Trust, J.P. Morgan Asset Management, PIMCO and PowerShares by Invesco to offer these first of its kind models.
CLS currently offers eight Smart ETF Models, which are globally diversified portfolios composed of smart beta and active ETFs, along with smaller satellite positions in ETFs focused on specific sectors, countries and alternative assets. The Smart ETF Models were designed to focus on total return proportionate to the investor’s Risk Budget (which can range from conservative to aggressive). They are currently available on Orion Communities (through CLS’s sister company, Orion Advisor Services), Envestnet, FTJ FundChoice and others.
“At CLS, we recognize that in our ever-changing industry, offering low-cost solutions1 that add value to an investor’s portfolio is crucial for an advisory firm’s growth and success,” said CLS CEO Ryan Beach. “We also recognize the positive impact that smart beta and factor investing have on portfolios. While zero-fee models traditionally contain allocations to only one provider or entity, CLS’s Smart ETF Models will provide advisors with a solution that incorporates ETFs from multiple providers and align with the client’s Risk Budget and CLS’s active outlook.”
Asset managers are developing new methods to help millennials overcome significant mistrust of the markets.
After experiencing two major bear markets — the tech bubble in 2000 and the global financial crisis in ’08 — younger investors have little reason to trust the markets, said Kostya Etus, a portfolio manager at CLS Investments. As a result, they are demanding products that are easy to understand and offer transparency, he said.
“The millennial generation is getting married a little bit later, having kids a little bit later, building houses a little bit later, and all of these things have happened for most millennials in the last five years or so,” Etus said in an interview with Money Management Executive. “Part of it is education and a part of it is just the natural evolution that you’re going to start seeing, where more and more millennials begin to save for retirement because they need to think about their family and their futures.”
“Instead of taking time to do a phone call … millennials really simply don’t have the time to do it and they’d rather send a text message or get text message notifications,” said CLS portfolio manager Kostya Etus.
As flows have continued to move to ETFs over the past decade — growing as much as 20% to 30% per year, according to Etus — socially responsible strategies have become one place managers have looked to drive interest. With boomers now entering their decumulation phases, the time to bring millennials up to speed is now, he said.
“Explaining to millennials that there are investments like this and giving options for ESG investments would really be a great way to help them get invested,” he said. “Showing how much impact you have is actually bringing to the world something really impactful.”
An edited version of the conversation follows.