The start of a new year, especially one that marks the start of our third year of a pandemic, can be unpredictable. It’s safe to say that no one can quite predict what’s coming next with the industry, the markets, or our own day to day lives, for that matter.
But over the last three years, we’ve all become accustomed to adapting — and adapting again — and again as the need arises.
Here at Dakota, we’ve made it our goal to be the go-to resource for investment sales professionals, whether that's through our database platform, our educational resources, or our weekly Dakota Live! Calls. We know there’s an overwhelming sense of news fatigue by now, a saturation of “Trends” and “What to Expect” pieces that have flooded our inboxes.
This is why we’ve run through them all for you.
In this article, we’re going to walk you through eight investment industry trends for 2022. By the end of the article, you’ll have a better sense of what you need to keep an eye on, and what might be coming to an end this year.
With bonds still offering low yields and negative real-rates, and public equities providing exceptional returns since the onset of the pandemic, many pension funds are trying to lock in their gains as they’ve reached fully-funded status. Despite the unattractive valuations of bonds, pensions simply want to match their expected liabilities without risk, becoming a valuation agonistic buyer. Then the question becomes: what do you do if they’re not at that fully-funded status?
For non-pension fund allocators, making a bond allocation is an active choice within port construction and IPS creation. Historically bonds provided a portfolio buffer in times of volatility and a source of income. In 2021 however, bonds gave us a taste of what to expect when inflation, which has not been present for years, and the FED signals an unwind of massive stimulus. The asset class failed to provide income above the rate of inflation, nor did it provide a buffer during yield backups that caused equity volatility. While likely a temporary phenomenon, it will not be easy to time when bonds have cleared the inflation and QE unwind.
Currently, larger companies are offloading their pension risks to insurance companies to get rid of their liabilities and have offloaded these balance sheet risks. Now, Instead of trying to sell directly to pension fund CIOs and their consultants, managers are going to need to get in front of insurance companies that now own these assets as need to smooth out expected returns for future retirees will continue.
We can’t be sure when this pattern of mergers and consolidations will end. The question becomes: How do you know when it’s time to go it alone, Partner up with a larger mega RIA, or when it’s the right time to sell? RIAs are valued at a multiple of their revenue, and their revenue is based on assets. If the market takes a hit, does that hurt RIA valuations, and how does an RIA make the right choice? Do you sell while the are markets high, access to capital for potential acquirers is abundant, and get a big pay day? This trend is likely going to continue as long as RIAs enjoy relatively high asset levels and consolidation offers economies of scale for “mega RIAs’.
With interest rates at historically low levels, duration extended for many fixed income asset classes, and equities on the higher end of valuations, it will be difficult for advisers to construct efficient 60/40 portfolios. As advisers seek to buy or allocate to alternatives, the question becomes: who is the go to? What is the right alternative?
We’ve seen this leading to firms democratizing alternatives, broadening out the distribution of the asset class and mixing them into portfolio construction built for today’s environment.
Stemming from the 2008 market crash, the investment and financial industry talent pool has been scarce, with younger talent being attracted to new industries post GFC, and a high turnover rate to coincide with that. Going into 2022, we are likely to continue to see this fight for good talent continue as the world contends with the “great resignation” and the “great reorganization.”
While this has been an ongoing concern for many over the last year or so, it is unknown whether inflation will continue to rise, creating concern, or will gradually come down and start to ease. This could result in prices continuing to climb, or a price reduction and an inventory glut as things slowly proceed back to normal. It will be crucial for allocators to understand how inflation, and what type of inflation impacts their client and then how to gain exposure to that inflation threat. A trucking or airline company may need to protect themselves from a rise in fuel costs, while a retiree’s biggest concern may be healthcare costs.
The last few years have seen a record number of ETF product launches. The problem with this is that these products have been launched without much (if any) demand taking the approach of “build it and they will come”. This has resulted in 1 in 20 of those products being delisted quickly. The answer here could be mutual funds, SMAs, UCITS and model delivery which require less activity, and allows more control of the owners who issue the strategy. Flows continue to favor low cost beta exposure to indices with over one third of 2021 flows going into these index tracking products.
Because investors and many central banks for that matter don’t know the, end point of interest rates, bank loans, CLOs, and anything with a variable rate/short duration may continue to be a popular asset class. This could lead to asset classes like private credit, CLOs, and bank loans getting major flows as investors try to generate income while trying rid duration which can be a headwind as yields increase.
While this list is designed to give you an overview of trends we’ll be keeping our eye on this year, as we mentioned above, nothing can be known for sure, and we’ll continue to monitor these things as the year progresses.
The best course of action is to continue to monitor these trends, and try to focus on the things you can control. No one can control the markets, or inflation and interest rates, but you can focus on attracting and retaining great talent, and ensuring that your firm is well staffed for the time ahead.
You can also make sure you have the best training and resources possible for your team, so that you’re always up to date on current events, trends, and more.
Written By: Gui Costin, Founder, CEO
Gui Costin is the Founder and CEO of Dakota.
November 14, 2023
November 07, 2022
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