Embrace Volatility: Quality and Income are your Friends
Market volatility provides a slew of opportunities and challenges for investment managers whose role during this time is to calm clients while determining the best path forward with their portfolios.
While banks, wirehouses and RIAs are pouring resources into developing competitive wealth management offerings, many are focusing too much on providing products and not enough on curating the client experience during times of volatility. More and more, investors are seeking quality advice, premiere expertise and straightforward information.
Periods of volatility bring the opportunity to meet this need and it is during this time that managers need to act. Advisors should be doing everything they can to optimize their businesses by making strategic decisions to streamline operations so they can spend more time with their clients.
Finding the right strategy, though, is not quite as simple as prompting ChatGPT to give you the best investment playbook. While some firms are quick to put all their eggs in the artificial intelligence (AI) and ChatGPT baskets – citing productivity benefits – humans are still valuable and important in the process.
A “shared CIO” arrangement serves as a technology and productivity enhancer, providing advisors with more tools, insights and data than they might have access to on their own. It enables advisors to tap into a broader team with analysis, research and insights without the operational challenges of bringing that team on in-house; and it empowers advisors to do what they’re best at: client services. Particularly during times of volatility and stress, this approach can be a highly valuable asset.
Evaluation and evolution are crucial, especially in times of high volatility, and there are a few strategies both advisors and investors can employ during this, and future, periods of volatility:
- Manage cash more strategically. Chances are, there are excessive amounts of cash sitting in checking accounts earning 0%. If you haven’t looked at floating rate treasuries for your cash management, there is an opportunity to earn over 5% today while banks are failing to pass Fed rate hikes to checking accounts.
- Look at profitability and quality. Review your portfolio, look at your equity holdings and screen for profitability and quality. An overly tight Fed that is creating volatility can hurt the most cyclical stocks. Companies with strong balance sheets, higher free cash flow and low debt have lower refinancing risk and are less vulnerable to profit slowdowns with higher rates caused by Fed tightening.
- Take advantage of the higher yields in fixed income. Yields on quality-screened high-yield bonds can deliver over 8% and that may approach similar returns on equities given elevated market valuations. Quality screens are important to do due diligence on companies that you’re investing in. You don’t need an active manager to conduct such screens any longer, as some index-based ETFs apply screens for quality within the high-yield bond universe today.
- When market returns are muted or negative, look at strategies that incorporate downside market cushions, like options selling. Because this is more complicated for the average investor, leveraging an asset managers or a “shared CIO” approach can help walk you through the benefits. If expectations for returns are subdued, writing options can turn higher volatility into higher income levels that provide downside market cushions.
Advisors know they often need to wear multiple “hats” to deliver a superior wealth management solution. These hats are critical to running their business. But the burden of all these hats can make an advisor feel like the business is running them, especially during sustained periods of volatility.
This brings us to our conclusion: outsourcing wealth management services, whether via a “shared CIO approach,” or AI, will increase dramatically in the coming years. The wealth management practice that can capture this experiential magic in its wealth management offering will be the firm that succeeds.
Important Disclosure Related to this ArticleAll investing involves risk, including possible loss of principal. Fixed income securities involve interest rate, credit, inflation, and reinvestment risks. Fixed income securities will normally decline in value as interest rates rise. High yield bonds are subject to greater price volatility, illiquidity, and possibility of default. Securities with floating rates can be less sensitive to interest rate changes than securities with fixed interest rates, but may decline in value. The issuance of floating rate notes by the U.S. Treasury is new and the amount of supply will be limited. Derivatives, such as options, can be illiquid, may disproportionately increase losses, and have a potentially large impact on portfolio performance.
Jeremy Schwartz has served as our Global Chief Investment Officer since November 2021 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity Indexes, quantitative active strategies and multi-asset Model Portfolios. Jeremy joined WisdomTree in May 2005 as a Senior Analyst, adding Deputy Director of Research to his responsibilities in February 2007. He served as Director of Research from October 2008 to October 2018 and as Global Head of Research from November 2018 to November 2021. Before joining WisdomTree, he was a head research assistant for Professor Jeremy Siegel and, in 2022, became his co-author on the sixth edition of the book Stocks for the Long Run. Jeremy is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” He received his B.S. in economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Jeremy is a member of the CFA Society of Philadelphia.