Top Industry Developments in July
Industry Developments
Investor Trends????
Advisor Trends
ESG Trends
Retirement
Regulatory
Investment Opportunities & Outlook
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Brief Summaries of the Headlines
Industry Developments
Investors reap $3.4 billion in savings from reduced fund expenses in 2023, despite a deceleration in fee cuts and a notable increase in fund fees, reflecting a shift to more expensive fund options
Investors experienced the lowest fund expenses on record in 2023, saving around $3.4 billion. However, this reduction in fees was significantly slower than the 2022 level. A surprising trend emerged: more funds increased fees than decreased them, marking a shift from recent years. The rise of active and alternative ETFs contributed to higher fees for new funds. Cost pressures are forcing asset managers to slow down fee reductions, with some even raising fees. Despite this, investors continue to favor low-cost funds, particularly index funds. However, the growing popularity of fee-based financial advice might offset savings from reduced fund expenses.
While the average fee is now half of what it was two decades ago, the industry is approaching a floor, especially for index funds. Vanguard remains the leader in low-cost funds, though competitors are catching up. Passive funds continue to dominate inflows, with the cheapest funds attracting the lion's share.?
Source: Morningstar
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Active ETFs attract 25% of ETF flows globally despite accounting for only 7% of total ETF assets, reflecting a strategic investor shift towards active management
The global ETF flows in the first half of 2024 reveal a significant trend in the ETF market, with active ETFs capturing 25% of the flows, despite constituting only 7% of all ETF assets. This segment saw substantial growth, with assets increasing from $714 billion to a record $889 billion. Active ETFs seem to be increasingly favored by investors, indicating a strategic shift towards active management in the ETF sector.
In the European market, a record €52.9 billion was gathered in the second quarter of 2024, marking a significant increase from €45 billion in the first quarter. This growth was primarily fueled by strong demand for US equity and a rebound in fixed income flows. Equity strategies dominated, drawing €40.5 billion. Bond ETFs also saw increased flows, reaching €11.7 billion. However, ESG ETFs experienced a slowdown, gathering only €4.6 billion.
Source: ETF Express
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Investor Trends
Surge in money market funds redefines US mutual fund landscape in 2023, with over half of households now investing in mutual funds amidst industry growth
The US mutual fund landscape experienced a dynamic shift in 2023. While long-term mutual funds faced outflows, the overall industry witnessed growth, driven largely by a surge in money market fund investments. This trend propelled the number of US households invested in mutual funds to reach 68.7 million, just over half of total US households.
However, underlying these figures is a broader transformation. A declining interest in actively managed funds has paved the way for the rise of index-based ETFs and mutual funds, which now constitute almost half of the total market value. This shift reflects a growing preference for passive investment strategies among investors.
Furthermore, the report highlights generational differences in investment behavior. Younger investors are increasingly exploring alternative asset classes such as cryptocurrencies, while older investors maintain a stronghold on traditional mutual funds. The differing approaches of full-service brokers and fee-based advisors further underscore the evolving dynamics of the industry.
Source: Financial Times
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Nearly 40% of Americans embrace AI for enhanced budgeting, investment strategies and financial planning; Gen Z at the forefront of technological integration in finance
The BMO Real Financial Progress Index reveals a surge in AI adoption for financial management, particularly among Gen Z. Nearly 40% of Americans use AI for budgeting, investment strategies, and financial planning. However, despite AI’s growing role, 64% of users recognize its limitations in understanding the emotional aspects of financial planning. While AI excels in data analysis and routine tasks, human advisors remain crucial for personalized guidance. The combined approach, leveraging AI's efficiency and human expertise, is seen as the most effective path to financial success.
Gen Z is leading the AI charge, utilizing the technology across various life areas. Despite financial anxieties, they are optimistic about AI's potential to improve financial decision-making and progress. The study underscores the evolving role of AI in personal finance, emphasizing a hybrid model that combines technology and human interaction.
Source: BMO
Advisor Trends
Younger investors favor digital platforms over traditional referrals for choosing financial advisors, highlighting the need for a robust digital marketing strategy
A recent survey reveals a significant shift in how investors choose financial advisors. While referrals have traditionally been crucial, especially among older generations, the younger demographic is increasingly turning to digital platforms. Only 17% of investors aged under 44 rely on referrals, compared to 60% of those over 60. Conversely, digital marketing has driven advisor selection for 57% of younger investors, highlighting the growing importance of online presence.
To succeed in the future, financial advisors must adopt a robust digital marketing strategy. While referrals remain valuable, they can no longer be the sole focus. A multi-channel digital approach, including online reviews and a strong digital brand, is essential to attract and convert younger clients. The survey also emphasized the need for multiple digital touchpoints to effectively engage potential clients.
Source: GlobeNewswire
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Engaging with financial advisors boosts retirement savings, accelerates debt freedom, and enhances financial confidence across generations and racial groups
According to a study by Northwestern Mutual, a strong correlation exists between working with a financial advisor and improved financial outcomes. Americans with advisors anticipate retiring two years earlier, have double the retirement savings, and feel significantly more confident about reaching their financial goals compared to those without advisors.
Beyond retirement, advisor clients are more likely to achieve student loan debt freedom sooner and have better financial habits. The study also highlights the growing trust in financial advisors over other sources of financial advice. Interestingly, younger generations are increasingly seeking professional guidance at earlier ages. While the benefits are widespread, the impact is particularly pronounced among Black Americans. Those with advisors experience faster retirement timelines, higher savings, and quicker debt repayment. This underscores the role of financial advisors in addressing racial wealth disparities.
The study concludes that financial advisors are in high demand as Americans recognize the need for expert guidance to navigate complex financial landscapes and achieve their long-term goals.?
Source: Northwestern Mutual
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ESG Trends
Major asset managers scale back new ESG fund launches amid regulatory challenges and poor performance, signalling a cautious shift in the once-thriving sector
The once-booming ESG fund market is experiencing a significant slowdown. Major asset managers like BlackRock, DWS, Invesco, and UBS have drastically reduced the number of new ESG fund launches in 2024 compared to previous years. This decline is attributed to a combination of factors, including poor fund performance, regulatory scrutiny, and political backlash.
The ESG label has faced increased scrutiny in both the U.S. and Europe, with regulators tightening rules and politicians criticizing the concept. Moreover, the performance of many ESG funds has fallen short of expectations, leading to investor disillusionment. While the broader fund market continues to thrive, ESG funds are struggling to attract the same level of interest. Asset managers are now focusing on refining existing products rather than launching new ones, reflecting a more cautious approach to the ESG space.?
Source: FA-mag
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Nearly two-thirds of asset managers report major challenges with ESG data reliability, complexity and cross-judicial comparisons amid concerns of greenwashing
A CFA Institute survey underscores the challenges faced by asset managers in implementing the EU's Sustainable Finance Disclosure Regulation (SFDR). The lack of reliable ESG data is a primary obstacle, with 65% of respondents citing it as a major hurdle. Additionally, the complexity of ESG information and the difficulty in comparing ESG products across jurisdictions pose significant challenges. The survey reveals growing concerns about greenwashing, as investors struggle to navigate a landscape cluttered with ESG labels. The EU Taxonomy Regulation, designed to classify sustainable economic activities, is also seen as overly complex by many.
To address these issues, the CFA Institute recommends a more focused and investor-centric approach to ESG regulation. Clearer ESG terminology, improved data quality, and simplified fund categorization are crucial steps. While acknowledging the EU's leadership in sustainability, the report emphasizes the need for a regulatory framework that balances ambition with practicality.?
Source: Funds Europe
Retirement?
Over half of workers without defined contribution plans unlikely to meet financial goals, with single females, Gen Xers and Baby Boomers facing the greatest challenges
A new report by Morningstar reveals that most workers who are participating in DC plans may not hit their retirement goals, with single females, Gen Xers, and Baby Boomers at greater risk. The report found that 57% of workers who do not participate in DC plans may not sustain projected retirement expenses, compared with 21% of those with at least 20 years of participation. In addition, 45% of American households are predicted to run short of money in retirement, with single females facing a higher risk (55%) compared to couples (41%) and single males (40%).
The research also cast fresh light on socioeconomic disparities. The model projects some 61% of Hispanic Americans and 59% of non-Hispanic Black Americans would face retirement shortfalls, compared with roughly 40% for both non-Hispanic other Americans and non-Hispanic white Americans.?
Source: Planadviser
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A growing need for comprehensive retirement support surfaces as majority of plan participants admit to undersaving, highlighting a substantial savings gap
A JP Morgan study highlights a growing need for comprehensive retirement support among plan participants. The study reveals a significant shift towards seeking robust retirement income solutions and financial wellness resources.
Key findings include a substantial gap between desired and actual retirement savings, with 63% of participants admitting to undersaving. While financial wellness programs are valued by nine in ten participants, a concerning 39% lack basic emergency savings. Participants overwhelmingly desire professional advice, yet only half currently receive it. There's a strong preference for guaranteed income options in retirement, with nine in ten expressing interest in such solutions.
The survey underscores the importance of plan design features like automatic enrolment and contribution escalation, as well as the appeal of target date funds. To address participant needs, plan sponsors are encouraged to offer financial wellness support, professional advice, and retirement income solutions.
Source: JP Morgan
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Regulatory
SEC approves nine Ether ETFs following Bitcoin’s earlier success, signaling stronger integration of cryptocurrencies into traditional finance
The Securities and Exchange Commission (SEC) approved nine ether ETFs, a significant development for cryptocurrency investors following the launch of bitcoin ETFs earlier in 2024. This approval follows the launch of Ether futures ETFs in 2023 and further strengthens the presence of cryptocurrency in traditional finance.
The approval is seen as a positive step for crypto advocates and could lead to wider adoption by traditional asset managers. Initial trading showed good market quality with competitive fees offered by most issuers. ?Analysts predict that these Ether ETFs might not attract as many assets as the bitcoin ETFs due to the complexity of the Ethereum blockchain compared to bitcoin's simpler "digital gold" perception. While the initial inflow might be lower, estimates suggest these ETFs could gather around $15 billion within the first 18 months.?
Source: Financial Times
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Surveillance of off-channel communications named as top compliance concern for advisors, prompting increased investments in electronic surveillance systems to mitigate risks
A recent study reveals a significant shift in compliance priorities for investment advisors. Off-channel communications (73%) surveillance has surpassed the SEC's Marketing Rule as the top concern, underscoring the heightened regulatory focus on employee communications. The use of unapproved communication channels like WhatsApp and personal phones by employees has led to substantial fines imposed by the SEC. This has prompted firms to invest heavily in electronic surveillance systems to mitigate risks.
Beyond off-channel communications, advertising and marketing (65%), as well as cybersecurity (57%), remain critical compliance areas. The survey also indicates a growing emphasis on AI and predictive analytics. Investment advisors are proactively preparing for potential SEC exams by conducting mock examinations and enhancing compliance programs. The findings highlight the dynamic regulatory landscape and the need for robust compliance frameworks to safeguard client interests and avoid penalties.
Source: ThinkAdvisor
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Investment Opportunities & Outlook
Active management of US large cap stocks demonstrates potential for significant alpha, challenging the dominance of passive index-tracking approaches
Investors today have a wide array of options for building their portfolios, including various asset types and investment vehicles. While U.S. large-cap stocks are often a core component, many believe passive index-tracking products are the best way to gain exposure due to the perceived efficiency and transparency of the U.S. equity market, which supposedly leaves little room for active stock selection to generate alpha (above-market returns). However, this perspective is challenged by the significant alpha potential in U.S. large caps.
Historical data shows that U.S. large-cap stocks have provided meaningful alpha opportunities globally, driven by the excess returns of top-quartile managers and the significant U.S. presence in global markets. For instance, top-quartile U.S. large-cap managers have achieved average excess returns of 3.2% over the past 20 years, translating to potentially more than 1,000% cumulative returns when applied to U.S. large caps' 543% return over the same period.?
Source: BlackRock
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Investors reassess impact of trade wars amid rising protectionism, evaluating stock market resilience, economic growth, inflation concerns and sector-specific impacts
A trade war is an economic conflict characterized by increasing tariffs and protectionist trade barriers. Investors are revisiting the topic due to the rise in "my country first" policies in recent elections. Key impacts of a trade war for investors include:
1. Stock Market Performance - Tariffs have shown little impact on stock performance, with domestically focused companies not outperforming those with international sales during Trade War 1.0 (2018-19). The MSCI All Country World Index, S&P 500, and MSCI China Index had neutral reactions to past trade tensions.
2. Economic Growth - Despite increased tariffs, global trade did not decline during Trade War 1.0, and trade volumes are near an all-time high. However, tariffs can still act as a drag on growth.
3. Inflation and Central Bank Policies - A potential Trade War 2.0 could affect central bank rate cuts and the global manufacturing recovery, leading to more market volatility but less downside risk than headlines suggest.
4. Sector-Specific Impacts - The impact of tariffs varies by product due to supply and demand nuances and the ability to substitute goods not subject to tariffs.
Source: Charles Schwab
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Investor interest in power market surges as AI demand boosts electricity needs; analyst forecast 165% increase in data center power demand by 2030
The power market, traditionally less liquid and harder to observe than commodities like oil and copper, is gaining interest from investors, including hedge funds and asset managers. Power derivatives are often traded bilaterally in over-the-counter transactions. Investor interest is growing, particularly among those already invested in AI.
AI technologies such as large language models, require a growing amount of electricity. Goldman Sachs Research analysts estimate that data center power demand will grow 165% by 2030 (as of July 9, 2024). That adds to the increasing demand for power from electric vehicles and the onshoring of manufacturing and supply chains. US data centers are particularly concentrated in the Virginia area. Goldman Sachs Research documented a rise in commercial power consumption there of 37% from 2016 to 2023, as power demand remained roughly flat in most other states.
Source: Goldman Sachs
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