In this edition of the Investments Roundup, we speak with our newest Investment Solutions Leader of the Month, David Mann, Head of ETF Product & Capital Markets at Franklin Templeton, who discusses market considerations for active exchange-traded funds (ETFs).
Other entries include State Street anticipating ETFs could surpass $1 trillion in 2024 inflows; Capital Group and KKR filing for public-private fixed income interval funds; TradingBlock adding customizable order-routing algorithms, Credent publicly releasing its turnkey asset management platform (TAMP); BlackRock, GeoWealth and iCapital collaborating on RIA access to alternatives; the CAIA Association launching a private equity microcredential; AXA launching an investment grade three-year fixed maturity product; Cerulli reporting that advisors prefer model portfolios to funds of funds; HFR finding hedge fund capital rose to a fourth consecutive quarterly record; and J.P. Morgan releasing its Long-Term Capital Market Assumptions.
Larry’s Take
The overriding question for every investment management professional right now ought to be how to address the potential ramifications of President-elect Donald Trump’s policy proposals. Regardless of your politics, with Trump poised to re-enter the White House backed by GOP control of the Senate, and more firsthand experience of how government works than when he first got elected in 2016, he is likely to implement at least some of those policies in 2025.
Deregulation could boost corporate earnings, tax cuts could leave more cash in investors’ accounts and tariffs could increase inflation. Other proposals, such as allowing oil companies to increase domestic production and tasking Elon Musk with cutting government bureaucracy, could have various unpredictable effects on the economy and client portfolios. Then there is the pro-cryptocurrency contingent of Trump’s base and his stated desire for more interest rate cuts.
Since nobody has a crystal ball, and especially when it comes to Trump, financial professionals have every incentive to pursue highly diversified strategies in the near future that include significant allocations to stable fixed income holdings, a broad basket of equities, as well as uncorrelated alternative investments. That third part of the portfolio could be where a more aggressive stance regarding the “Trump Trade” unfolds.
If you would like to discuss this Larry’s Take further, including how these trends might impact your business, please contact me at larry.roth@rlrstrategicpartners.com.
1. Franklin Templeton’s David Mann Discusses Growth In Active ETFs
Franklin Templeton released a Nov. 6 market reaction to Donald Trump’s victorious re-election to the Presidency and Republican control of the Senate. It found that mid-caps, fossil fuel energy companies, pharmaceuticals, financial services and cryptocurrency investments stand to benefit, while crude oil prices could face downward pressure.
The company had $1.7 trillion in assets under management (AUM) as of September, and a staff of approximately 1,600 investment professionals across more than 25 countries. Its subsidiaries include Putnam Investments, ClearBridge Investments, Westen Asset and several other entities. And now for our Q&A with David Mann, Head of ETF Product & Capital Markets at Franklin Templeton.
WSR: What factors led to active ETFs surpassing $1 trillion in AUM globally at the end of August, and what does this growth mean for the future of active ETFs?
Mann: The “ETF Rule” of 2019 was a game changer, with the SEC explicitly stating that there was not any operational distinction between active and passive ETFs. Investors realized that the ETF benefits they have come to love through the years in index funds – including transparency, liquidity and tax efficiency – now apply to active strategies as well.
This opened the door for issuers to launch active products quicker and cheaper, and we believe this surge will continue, especially as many of these active ETF strategies reach their three-year and five-year track records.
WSR: How can financial advisors assess which active ETFs are most suitable for their clients’ portfolios?
Mann: We believe financial advisors should combine the traditional active manager due diligence process with metrics unique to ETFs. The analysis should dig deeper than just past performance and understand the manager’s strategy and investment philosophy and how they align with a client’s goals and risk tolerance.
Then, in addition to the manager’s track record and tenure, consideration should be given to fees, tax efficiency, the ETF’s trading profile and the issuer’s capital markets expertise. At the end of the day, it’s about finding not just a good fund, but the right fit for your client.
WSR: What kinds of active ETF solutions does Franklin Templeton provide that may be of use to financial advisors?
Mann: We’ve created a diverse, multimanager ETF platform powered by active management. With over 40 active ETFs spanning all asset classes, it’s a comprehensive toolkit for clients. Our active ETF platform unites 11 specialist managers, giving a set of tools to serve wealth managers and their clients in a variety of ways across an entire portfolio.
Recent client conversations have featured INCM [Franklin Income Focus ETF] managed by Ed Perks and the Franklin Income Investors team, PVAL [Putnam Focused Large Cap Value ETF], and FLHY [Franklin High Yield Corporate ETF] managed by the Franklin Templeton Fixed Income team.
2. State Street: ETFs Set To Surpass $1 Trillion In 2024 Inflows
The State Street Global Advisors US-Listed ETF Flash Flows: Oct. 31 report found that ETFs had year-to-date flows of $830 billion and were on track for over $1 trillion for full-year 2024. As it stands, ETFs have already brought in over $1 trillion during a 12-month period for the first time ever.
Low-cost core ETFs had inflows of $61 billion in October and $435 billion year-to-date. Active ETFs had a record $33 billion of inflows in October and $238 billion year-to-date. Bond ETFs had $31 billion of inflows in October and a record $250 billion so far this year. Historically, the last two months of the year have been 164% higher than the average monthly flows during the first 10 months of year, State Street found.
“Based on that potential final two-month boost, flows for 2024 could be $1.091 trillion —
$100 billion more than the prior annual flow record of $909 billion in 2021,” according to the report by Matthew Bartolini, Head of Americas ETF Research at State Street Global Advisors. “With mutual funds in net outflows of -$150 billion, this cements ETFs as the vehicle of choice for investors deploying capital — either strategically or tactically.”
3. Capital Group, KKR Partner On Public-Private Fixed Income Interval Funds
Capital Group and KKR filed registration statements with the Securities and Exchange Commission for two public-private fixed income interval funds, Capital Group KKR Core Plus+ and Capital Group KKR Multi-Sector+, with the goal of launching them in the U.S. in the first half of next year through the wealth management space.
The new category aims to provide simplified portfolio construction and enhanced client support. As of Sept. 30, Capital Group managed over $555 billion in public fixed income assets and more than $2.8 trillion in equity and fixed income assets. As of the same date, KKR managed over $105 billion in private credit assets and had approximately $624 billion in AUM.
“As a firm, we do not enter a new market unless we are committed for the long term and believe we can offer something meaningful and durable for our clients,” said Holly Framsted, Head of Global Product Strategy and Development at Capital Group. “These strategies aim to solve the access gap that individual investors currently face when it comes to private investments, and we expect these two public-private strategies will be the first of many across asset classes and geographies.”
4. TradingBlock Adds Customizable Order-Routing Algorithms
TradingBlock, a Chicago-based provider of custom trading technology for institutions, individuals and RIAs, enabled traders on their platform to create customized order-routing algorithms to align with their unique trading strategies. The capability is available to asset managers, as well as professional and active traders.
Order-routing algorithms, which are software-based instructions used to determine how to carry out buy or sell orders for securities, are designed to enhance the efficiency and effectiveness of executing trades, including options strategies, in dynamic market environments. Traders will be able to design their own order management protocols and their algorithms will be kept confidential.
“By providing clients the ability to deploy customized order-routing algorithms, TradingBlock is once again strengthening its commitment to being made for the way you trade,” said Gino Stella, Institutional Trading Manager at TradingBlock. “This new capability gives traders more control as they can tailor their order routing algo to their strategy. They are no longer tied to broadly used, off-the-shelf algorithms.”
5. Credent Publicly Releases Its Longstanding Internal TAMP For Advisors
Auburn, Indiana-based Credent Wealth Management, an RIA with $3.2 billion in assets, made its TAMP, Credent Advisor Solutions (CAS) – which has been offered internally to the firm’s network of advisors since inception in 2016 – available publicly to any advisor.
CAS provides back-office support and investment solutions, as well as a built-in succession plan option. Advisors seeking to join may do so through B2B partnerships, 1099 agreements or minority interest arrangements. In July, Credent received over $50 million in debt financing capital from Fort Worth, Texas-based Crestline Investors, an alternative investment manager with $18 billion in AUM as of Dec. 31.
“Credent Advisor Solutions is not just another service; it’s an entry point for advisors who may not be ready to merge with a partner fully but are looking for ways to enhance their practice,” said David Hefty, CEO of Credent Wealth Management. “CAS was launched in response to feedback from advisors who, while not yet ready to transition out of the business, wanted to take advantage of Credent’s proven platform with an eye toward a long-term partnership.”
6. GeoWealth Teams With iCapital, BlackRock To Give RIAs Easier Access To Alts
A BlackRock, GeoWealth and iCapital collaboration uses iCapital’s technology to provide a custom platform for RIAs, enabling firms using GeoWealth to more easily include private assets in unified managed accounts (UMAs). The technology aims to minimize the complexity and multi-step process of investing in alternatives, including unified trade orders across investment products, automation, one-stop e-signature solutions and consolidated client communications.
The partnership facilitates access to BlackRock custom models intended to incorporate private markets, direct indexing and fixed income separately managed accounts (SMAs), alongside ETFs and mutual funds, in a single account. In this offering, GeoWealth provides advisors with workflows, reporting tools and investment management capabilities throughout an State Street Global Advisors US-Listed ETF Flash Flows lifecycle, and iCapital’s Multi-Investment Workflow Tool aims to streamline alternative investing.
“Modern RIAs require solutions to provide high-net-worth clients access to alternatives at scale,” said Colin Falls, CEO of GeoWealth. “The industry is racing to solve the challenge of implementing alternatives into model portfolios, while GeoWealth’s proprietary UMA technology will make this possible.”
7. CAIA Launches Private Equity Microcredential Program
The CAIA Association launched its Private Equity Microcredential for private wealth managers, on the UniFi by CAIA platform. In collaboration with Cliffwater, FS Investments and Meketa Capital, the program covers venture capital, growth equity and buyouts, while emphasizing portfolio implementation.
The self-paced online program features insights from asset and wealth management firms within five modules, that qualify for 7.5 hours of continuing education for Certified Financial Planner (CFP) and Investments & Wealth Institute (IWI) certificate holders. UniFi by CAIA also offers a Digital Assets Microcredential, a Private Debt Microcredential, a Real Estate Microcredential and the Fundamentals of Alternative Investments Certificate program.
“As the private equity asset class has matured, there are more considerations than ever for advisors to weigh, including the role that more established LP-led secondaries may play, the rise of continuation vehicles, and a strong desire (from both asset managers and investors) for more private equity exposure via regulated and semi-liquid vehicles,” said Aaron Filbeck, Managing Director at the CAIA Association.
8. AXA IM Launches Investment Grade Three-Year Fixed Maturity Product
AXA Investment Managers (AXA IM) launched the actively managed AXA IM Wave USD Credit 2027 fund, a three-year fixed maturity product (FMP). It is designed to invest in U.S.-denominated investment grade and high yield debt, have an investment grade average rating, and mirror the profile of a bond through a diversified portfolio.
The FMP seeks to capture yields available in the current market environment and provide an alternative to cash and money market investments, as short-term rates fall. It has a 33-person U.S. corporate credit investment team with experience managing short-term portfolios in U.S. investment grade and high yield debt. This is AXA IM’s ninth FMP launched since 2015.
“While we are extremely proud of our 30-year history in the fixed income space, we are equally excited to reenter the FMP space with the launch of this new product,” said Frank Olszewski, lead manager of the AXA IM Wave USD Credit 2027 Fund. “We are fortunate to boast a highly experienced team of US high yield and investment grade specialists who have managed nearly $65 billion in US credit assets through multiple market cycles.”
9. Cerulli: Advisors Prefer Model Portfolios To Funds Of Funds
The Cerulli Report—U.S. Product Development 2024 found that 61% of financial advisors plan to prioritize using model portfolios over funds of funds (FoFs), 44% of advisors reported using the FoF structure and a mere 8% anticipate increasing their usage of FoFs.
When assets that advisors oversee are placed in FoFs, they typically are for core client segments with lower investable assets, according to Cerulli. And while such advisors reportedly prefer to use active strategic funds, they are divided on whether the fees FOFs charge justify the value they actually provide. A majority of asset managers also reported that FoFs eat into the wealth management value proposition of portfolio construction, including model portfolios.
“The FoF structure is under pressure as it continues to conflict with part of the value proposition of financial advisors as portfolio managers, while other solutions, such as model portfolios, serve as a happy medium offering outsourced full-portfolio solutions that enable customization at the hands of advisors,” said Matt Apkarian, Associate Director, Product Development at Cerulli. “While the FoF structure will continue to be a mainstay of defined contribution retirement plan lineups, the use of the structure outside of 401(k) plans will be limited.”
10. HFR: Hedge Fund Capital Rose To Fourth Consecutive Quarterly Record
HFR found that hedge fund capital increased to a fourth consecutive quarterly record of approximately $4.46 trillion, up $148 billion over the previous quarter, amid new inflows of $15.86 billion and led by inflows into relative value arbitrage, equity hedge and event-driven strategies. The HFRI Fund Weighted Composite Index increased 2.8% in 3Q and 8.1% in the first three quarters.
The HFR Cryptocurrency Index fell 5.99% in 3Q and increased 17% in the first three quarters of 2024. The HFRI Relative Value Index (Asset Weighted) increased 3.1% in 3Q and 7.2% in the first three quarters. The HFRI Equity Hedge (Total) Index increased 3.8% in 3Q and 10.2% in the first three quarters. The HFRI Event-Driven (Asset Weighted) Index increased 4.6% in 3Q and 9.2% in the first three quarters.
“Hedge fund capital rose to a new record for the fourth consecutive quarter in the volatile third quarter, with managers navigating the largest dislocation and volatility spike in several years in early August, while the combination of election and geopolitical risks elevated to historic levels,” said Kenneth Heinz, President of HFR. “At the same time, interest rate and inflation risks shifted from the generational peak levels to align with expectations for slowing global growth and moderating inflation, with managers and investors positioning for lower interest rates to drive M&A activity in 2025.”
Wirehouse / Big Bank Activity
11. J.P. Morgan Releases Asset Class Forecasts For Next 10-15 Years
J.P. Morgan Asset Management released its 2025 Long-Term Capital Market Assumptions report, with a 10-15-year outlook for returns and risks across asset classes. The report forecast the annual return for a U.S.-denominated 60/40 stock-bond portfolio during that time period at 6.4%. It forecast U.S. large cap equities to return 6.7%, global equities to return 7.1% and emerging markets equities to return 7.2%.
U.S. intermediate Treasuries were forecast to return 3.8%, long Treasuries were forecast to return 5.2%, U.S. investment grade credit was forecast to return 5% and U.S. high yield credit was forecast to return 6.1%. For alternatives, private equity was forecast to return 9.9%, U.S. core real estate was forecast to return 8.1%, global core infrastructure was forecast to return 6.3% and broad basket commodities were forecast to return 3.8%.
“Our Long-Term Capital Market Assumptions provide a roadmap for navigating the complexities of today’s markets,” said John Bilton, Head of Global Multi-Asset Strategy at J.P. Morgan Asset Management. “This year’s findings underscore the value of active management and alternative asset classes in generating alpha and diversification. Investors are encouraged to incorporate assets that can navigate inflation shocks and fiscal risks, with bonds remaining essential for diversification.”
Chris Latham, Managing Editor at Wealth Solutions Report, can be reached at clatham@wealthsolutionsreport.com.
