Investors since 2007 have shown a marked preference for companies with strong and stable top-line growth. But now these stocks are on a significant premium to the market. Companies with high sales growth have attracted premium valuations, a function of the high level of risk aversion and perhaps because there have been so few companies outside technology able to produce reliable top-line growth. The risk premium, however, has started to come down. This chart was a reminder that there have been very long periods where growth equity has not has the spectacular run its had over the past 13 years.
ActiveAllocator.com has tailored solutions for different types of SWFs. These are a heterogenous group as are their challenges.
In this note I describe some of the ways we at ActiveAllocator bring an active approach to investing in corporate credit.
Credit Spread Signals
Valuation Relative to a Fitted Curve
Event Risk Indicator
Equity Signals and Covenants
Testing Equity Signals Without Bond Covenants
EDF and Rating Agency Measures of Credit Risk
Flags to Identify At-risk Credits
2020 again demonstrated that RIAs, Private Banks, independent Broker Dealers, Wealth Management platforms and financial firms can’t provide quality advice to everyone profitably. Few customers want to pay for it, and many investors don’t trust financial advisors. Meanwhile, traditional forms of asset allocation advice are costly, inefficient, and impersonal. We estimate that retail investors lose more than $400 billion annually in advisor fees and portfolio inefficiencies. This value destruction is both explicit in typical 1% or higher advisory fees charged and implicit in 0.5% or more asset allocation inefficiency. Moreover, these costs are in addition to other contracting frictions, product commissions and costs. To serve a broader audience, advisors put investors in cookie cutter, one size fits all “model portfolios,” which in turn commoditizes their own service and expertise. Model portfolios also fail to account for personal investment views, preferences, and limitations. Worse still, clients rarely know how inefficient their allocations really are and have no objective means to measure and value advisor performance.
One Size Fits All.
In this opinion piece we argue that the notion of putting retail investors in cookie-cutter mass-produced standardized buckets of allocations, referred to as model portfolios, is a remnant of antiquated ‘90s thinking. In 2021, it is akin to paying a doctor expensive fees for an over-the-counter pain medicine prescription. Wealth management firms, RIAs and broker dealer systems that ignore the disruptive ability of new asset allocation frameworks and technologies do so at their own peril. No longer can financial advisors take clients for granted and present them with undifferentiated canned finished asset allocation models.
These, as a cohort are lagging other institutional investors such as pension funds. Some exclusion criteria is used; and in a few cases some environment related investments have been made. They can do a lot more.
As long-term investors: They can reap long-term returns of environmental, social risk adjusted portfolios and ESG engagement. They can provide a source of stability in the capital markets.
As passive investors: Not always a good thing as this could dilute shareholders power and create a governance gap
As active investors: Engagement with the companies in which they hold some stakes. Make clear that the influence is purely economic based for any other type of influence could be a risk for other investors and the companies in which they hold stakes.