Data & Research November 8, 2023

Investors, Betting on Elevated Interest Rates Into ’24, Are Favoring Fixed Income

CoreData finds that 50% of respondents named fixed income as their preferred asset class for risk-adjusted returns—in part due to growing fears of a tech stock bubble.

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Institutional investors expect elevated interest rates and inflation in 2024, increasing the appeal of income-generating investments, according to CoreData’s Q3 2023 Equities Sentiment Report.

Fixed income is the most preferred asset class for risk-adjusted returns in the coming year, with 50% of 100 institutional investors surveyed choosing the investment option. That was followed by cash and equities, which shared the same ranking (47%).

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The prospect of higher rates has also prompted investors to adopt a more cautious approach, with 44% slowing down their investment in risk assets and 30% reducing their exposure, according to CoreData. Moreover, 43% of institutional investors have adjusted their strategic allocations to government bonds and cash-like investments, while 39% have grown their tactical exposure to these assets.

“These results show that 5% risk-free yields have completely changed the calculus for institutional investors,” said Michael Morley, U.S. research director at CoreData, in a statement.

Some of the flight to safety is due to the growing concern of a tech bubble forming in the stock market. Seven in 10—71%—said the technology sector is overvalued, up from 55% in Q2, according to the report.

Still Elevated

On November 1, the Federal Reserve held the key federal funds rate between 5.25% and 5.5%; this was the second meeting in which the Fed held rates, after a string of 11 rate hikes. However, inflation remained well above the Fed’s 2% target, the agency noted and said it remains “strongly committed” to bringing prices down.

CoreData’s Q3 survey found that 77% of respondents anticipate that interest rates and inflation will remain elevated over the next 12 months, a notable increase from the 65% figure reported in the Q2 survey, held in June.

Additionally, due to the higher interest rates, 39% of investors have raised their hurdle rate for risk assets, increasing the pressure on asset managers, according to the data providers. This has led to some investors parting ways with managers unable to meet their return expectations, with 38% of organizations reporting offboarding active strategies that have underperformed over recent years.

Still Active

Despite these challenges, 54% of investors maintained confidence in actively managed equity strategies, expecting them to deliver strong outperformance in the next year, the report found. This confidence comes from anticipated subdued market returns, it goes on to say. Yet, just 35% are bullish about U.S. equities in the next three months compared with the 45% who are bearish.

“The trend of de-risking portfolios and consolidating active investments with high-conviction managers is likely to accelerate, putting a painful squeeze on the industry, which is already faced with a low-beta environment,” Morley said.

CoreData’s Q3 2023 Equities Sentiment Report is based on an online survey of 100 U.S. institutional investors conducted in September. Respondent organizations included traditional asset managers, alternative asset managers, public sector pensions, private sector pensions, insurance companies, endowments/foundations and family offices.
Compliance November 8, 2023

Trade Groups Call for Longer Comment Period for Fiduciary Rule Proposals

The proposals would apply fiduciary status to one-time investment recommendations such as rollovers and annuity sales.

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Stakeholders in the retirement, insurance and investment industries published an open letter to the DOL, Wednesday, calling on the department to double the comment period for a new fiduciary rule proposal from 60 days to 120.

The DOL’s proposed amendments, announced last week, would apply fiduciary status to advisers making rollover recommendations and to insurance agents making annuity sales using retirement assets, both of which are often one-time transactions.

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The comment period for the proposal runs from November 3 through January 2, 2024. As the letter notes, this takes the period through multiple federal holidays and, according to the trade groups, leaves only 39 business days to file comments with the department.

The DOL also announced there would be a public hearing to discuss the proposal approximately 45 days after its publication in the Federal Register, or around December 18. The letter notes that this would require stakeholders who would like to testify to prepare their comments in even less time.

The industry letter also points out that previous iterations of the proposal, in 2010 and 2016, had 90-day comment periods with extensions.

Alexander Ryan, a partner in Willkie Farr & Gallagher LLP, says the DOL “is concerned about the notion that financial service professionals are evading ERISA [Employee Retirement Income Security Act] fiduciary status by taking the position that they are not giving advice to retirement investors on a regular basis.”

The proposal reframes “regular basis” and “relationship of trust and confidence,” key elements of a fiduciary relationship, as regular one-time recommendations made to investors in general, that is, “in the ordinary course of the firm’s business,” Ryan explains.

In the trade groups’ request for a longer comment period, the firms note the sweeping and complicated changes the proposal would bring.

The regulators are looking to swap the current five-part test defining whether an adviser is acting as a fiduciary with a three-part test. In the amended rules, a recommendation would trigger fiduciary status if the financial professional: has discretionary authority over retirement assets; identifies himself as a fiduciary; or renders paid advice on a regular basis to retirement investors when that advice can be relied on as the primary basis of an investment decision concerning retirement assets.

The proposal would also update PTE 84-24, which allows insurance agents to receive a commission for the sale of annuities to retirement investors. Ryan says the DOL was worried that this exemption was “too easy to comply with and isn’t sufficiently protective of retirement plan investors.” Further, the proposal would bring requirements from PTE 2020-02 into 84-24, so insurance agents have the same standards of care when making annuity sales that fiduciary advisers do.

The letter is signed by 18 stakeholders including the Insured Retirement Institute, the SPARK [Society of Professional Asset Managers and Record Keepers] Institute, the ERISA Industry Committee, the American Council of Life Insurers, the ESOP [Employee Stock Ownership Plan] Association and the American Benefits Council.

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