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A Dollar That Stays Within the Lines

As I look back at some of the comments made in CIO Weekly Perspectives about our constructive views on non-U.S. equity markets, a key aspect of the story has been improvement in sentiment and growth fundamentals in various countries and regions around the world. Another crucial element in my view has been a shift in currency market dynamics.

Unlike in 2014 and the first half of 2015, the recent market price action has not featured a sustained rally in the U.S. dollar. Instead, we’ve seen a healthy correction in the dollar relative to other currencies including the euro and in particular the yen, with the Fed’s U.S. Trade Weighted Major Currency Dollar Index declining almost 7% during the first four months of the year.

Our general view is that this is a positive development. Especially in the U.S., earnings growth has been a cloud over the markets since the third quarter of last year. The absence of further dollar strength, coupled with firmer energy prices, may be setting the stage for a better earnings picture in the second half of the year.
Fundamental Reasons for Dollar Decline

A key question, however, is whether recent dollar weakness is justified. We believe the answer is yes, based on both the fundamentals and technical factors.

First, the fundamentals. Prior to the dollar correction that started in early February, pessimistic views prevailed regarding the trajectory of the global economy, but we’ve since seen improved sentiment on China as well as encouraging signs in Europe.

Then there’s central bank policy. Back in Q3 and Q4 of last year, the Federal Reserve seemed determined to execute multiple rate hikes in 2016. But in the midst of a soft patch in U.S. growth, they turned more dovish in Q1, to the point where markets anticipated just one—or at most two—rate increases this year.

Unlike in previous episodes, other central banks have not aggressively “played down” their currencies so far in 2016, effectively giving a green light for the dollar to correct lower. Earlier this year, the Bank of Japan and, to a lesser degree, the ECB seemed poised to move aggressively into negative rates territory. However, following the market’s hostile reaction to the BoJ’s January rate cut, central banks appear to be pursuing alternative, more tempered, policy options.

Finally, from a technical standpoint, we think the U.S. dollar bull market simply exhausted itself. So many strategists, from asset allocation gurus to FX experts, were still in the dollar-strength camp last year. Recently, they’ve changed their minds, piling into the short dollar trade versus the euro and yen.

Where We Stand
Although we acknowledge the reasons for the dollar decline, we’re not in the bearish camp at this point. Rather, we think the dollar is settling into a trading range that could last for the rest of the year and into 2017, driven by the factors I’ve mentioned—a healthier mix of growth dynamics and cautious central bank policy. Indeed, we’ve recently seen headlines about central banks disappointing markets in their “failure” to take action, and I think we’ll see a lot more of that, and fewer surprises from monetary policymakers.

Overall, we believe there are currently few drivers to justify a sustained breakout from current trading ranges. In terms of our views and given the more attractive levels, this translates into a tactical net-overweight dollar exposure and a modest short in the yen.

A connected issue relates to commodity-driven currencies. Since mid-January, the Canadian and Australian dollars have seen a strong recovery. Although we think there is fundamental justification (i.e., better Chinese data), the move is also largely technical in nature. A recent decision by the Australian central bank to ease rates is symptomatic of the underlying reality that Australia is not immune from global disinflationary pressures. Despite opinions to the contrary, in the near term we see limited potential for a new bull market in commodities or, by extension, commodity-driven currencies.

Smoother Ride? More Potential for Shocks
In this environment of subdued market drivers, there are risks. An obvious one is the potential for a vote for Britain to leave the EU late next month. While polling numbers are still implying a reasonable chance of Brexit, bookmakers now price only a 30% chance of separation. Sterling has been factoring in a high Brexit premium for some time but it recently rebounded to reflect lower Brexit probabilities.

A more subtle issue is posed by the subdued, range-bound environment. Without big differences in growth or drama from central banks, currency markets can become more technical in nature, and more vulnerable to shocks from exogenous events.

Circling back to where I started, how does all this affect risky financial assets? For much of 2016, we’ve been talking about the potential for better earnings in the absence of headwinds from the strong dollar or commodity weakness. Now that they are actually out of the way, and central banks are becoming quieter, we believe that the focus is likely to shift to individual company and sector fundamentals. Rather than dwelling on the macro, the challenge and potential could be far more extensive at the micro level.

Neuberger Berman’s CIO insight by Brad Tank

Bolton Global Capital Adds a 173 Million Team

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Bolton Global Capital recently announced that Alex Astudillo has joined the firm’s Miami office. Alex held the position of Senior Vice President with Merrill Lynch where he worked for the past 14 years and built a successful international wealth management practice with $173 million in client assets and $1.8 million in annual revenues. “We are proud to have such a distinguished professional affiliate with our organization and look forward to supporting the continued growth of his business.” stated Ray Grenier, CEO of Bolton. Angela Canas will manage client support operations for the team which will be branded under the name Private Wealth Advisors. Angela has been with Merrill Lynch for the past 9 years.

With the acquisition of the Astudillo team, Bolton is continuing to establish its position as a premier destination for top wirehouse teams transitioning to the independent business model. Over the past 3 years, the firm’s Miami office has acquired seven major teams from Merrill Lynch and a half dozen other teams from Morgan Stanley, RBC Wealth Management as well as Citi and HSBC Private Banks.

The Bolton Massachusetts based firm offers teams with $100 million or more in AUM, access to a wealth management platform with all of the capabilities of the major firms for both domestic and international business. Even with robust growth in AUM over the last five years, Bolton is highly selective in accepting new teams. According to Grenier “Quality is our number one criteria for affiliation. The most successful teams in the business generally focus on client satisfaction and on mitigating portfolio exposure to losses. Affiliating with the highest quality professionals is the key to sustainable growth in the wealth management industry.

Ireland, Malta, Belgium, the Netherlands, Cyprus and Luxembourg, the Most Affected if Brexit Happens

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An exit from the EU by the UK (‘Brexit’) would weigh on the economies of other EU countries and increase political risks in Europe, Fitch Ratings says.

They mention that although they would not expect to take any immediate negative rating actions on other EU sovereigns if the UK left, negative actions would become more likely in the medium term if the economic impact were severe or significant political risks materialised.

“The economic impact of a yes vote in the 23 June referendum would be lower for the EU than for the UK, but would still be palpable. It would reduce EU exports to the UK, although the extent would depend on the nature of any UK-EU trade deal and the degree and duration of sterling depreciation.” The most exposed countries would be Ireland, Malta, Belgium, the Netherlands, Cyprus and Luxembourg, all of whose exports of goods and services to the UK are at least 8% of GDP.

EU countries could gain from the shift of some FDI from the UK to the EU. However, countries such as Luxembourg, Malta, Belgium and Germany, with a large stock of FDI and financial assets in the UK, would suffer losses in the euro value of those assets if there were a permanent depreciation of sterling. The banking sectors of Ireland, Malta, Luxembourg, Spain, France and Germany have sizeable links to that of the UK.

Brexit would reduce the UK’s contribution to the EU budget (a net EUR7.1bn in 2014 after rebates), potentially to zero. This would imply that other net contributors would have to increase payments, or net recipients accept lower EU expenditure. Brexit would create a precedent for countries leaving the EU. “It could boost anti-EU or other populist political parties, and make EU leaders more reluctant to implement unpopular policies with long-term economic benefits. Negotiating the terms of the UK’s exit could exhaust the EU’s time and energy and open up new fronts of disagreement. Brexit could shift the centre of gravity of the EU, making it more dominated by the eurozone core, poorer, more protectionist and less economically liberal. If the UK were to thrive outside of the EU, it might encourage other countries to follow suit.”

Brexit could precipitate Scotland leaving the UK, which might intensify secessionist pressures in other parts of the EU, such as Catalonia in Spain.

Fears of other countries leaving could widen bond spreads for “peripheral” countries, potentially increasing the average cost of debt and making it more challenging to reduce government debt/GDP ratios.

Fitch is not recommending any particular position, vote or outcome regarding the referendum vote on June 23rd 2016. If you want to read their report titled “‘Brexit’ Would Raise Downside Risks to EU Sovereigns”, follow this link.

U.S. Investors Expectations Do Not Reflect a Full Understanding of ETFs

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More than three-quarters of investors agree that index funds and exchange-traded funds (ETFs) are a cheaper way to invest, but 71% also believe they are less risky, according to new research published by Natixis Global Asset Management. The findings suggest that many investors have expectations that don’t reflect a full understanding of the risks of index funds versus the benefits.

“It is critical to understand the risks in your portfolio, so it’s troubling to see investors mistakenly assign benefits to index funds that they don’t actually have”

The asset management firm commissioned an independent survey of 750 individual investors in the U.S., from the affluent to the high net worth. It found that: 64% of investors think using index funds will help minimize investment losses; 69% believe index funds offer better diversification; And 61% believe index funds provide access to the best investment opportunities in the market.

However, investors expecting lower risk may have been surprised at the start of 2016 when the Standard & Poor’s 500 had its worst opening since 1928. The index bottomed out on February 11, having fallen 10.5% since trading began in January. The market did rebound, finishing the quarter 0.7% ahead. But tracking the index would have resulted in a hair-raising ride. And while the first quarter might be seen as an anomaly, volatility in markets is not.

“It is critical to understand the risks in your portfolio, so it’s troubling to see investors mistakenly assign benefits to index funds that they don’t actually have,” said John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia. “Index funds have a place in portfolios, but their low cost seems to be providing a ‘halo effect’ that could blind-side investors during volatile markets.”

Professional investors see the role for passive investing differently. Recent surveys of both institutional investors and financial advisors by the asset manager showed they preferred active strategies to take advantage of market movements, generate alpha and provide risk-adjusted returns, while viewing passive investing primarily as a way to save on management fees.

Investors willing to use new investment strategies

The survey finds evidence that investors are willing to move beyond 60/40 allocation investment approaches. Nearly two-thirds (65%) say a traditional approach (equities and bonds) to portfolio allocation is no longer the best way to pursue returns and manage investments.

Further, 70% of investors want new strategies that are less tied to broad markets and 75% favor strategies that can help them better diversify their portfolio, an approach that would seem to open the door to wider ownership of alternative investments.

But just over half of investors (52%) surveyed actually own alternative assets, a grouping that includes private equity, long-short funds, hedge funds and real estate.

Investors who don’t own alternatives say the assets are too risky (56%); 34% acknowledge they don’t understand how alternatives work, and 28% don’t think they need alternatives.

Investors say learning more about investing is the number one thing that would help them better achieve their investment objectives – adding to their financial knowledge was named by 42% of respondents.

“It is encouraging to see investors are looking beyond traditional asset classes to build portfolios designed to help them reach their financial goals through the widest range of potential market conditions,” said Hailer. “However, it is clear the financial industry still needs to provide more education to help investors make informed decisions.”

About the survey
Natixis surveyed 750 individual investors across the United States with a minimum of $200,000 in investable assets. The online survey was conducted in February 2016 and is part of a larger global study of 7,100 investors in 21 countries from Asia, Europe, the Americas and the Middle East. The findings are published in a new whitepaper, “Help Wanted: How investor behavior is rewriting the job description for financial professionals.”

PIMCO: How to Play the Brexit Blues

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For much of the last few months it has been difficult to have any conversation about the outlook for the UK, or indeed Europe, without discussing Brexit, says Mike Amey. Uncertainty over the outcome ‒ the PIMCO´s MD and Portfolio Manager continues to assign a 40% probability to the UK voting to leave the European Union (EU) ‒ has slowed economic activity, pressured UK bank assets, reduced liquidity in sterling-denominated corporate bonds and put sterling under pressure.

The one market that has not been overly affected is stocks, he says. Due to the multinational nature of many UK-listed companies, the Brexit vote is exerting two opposing influences on valuations: The uncertainty of the UK’s trade outlook is counterbalanced by the positive impact of sterling weakness on overseas earnings.

Although his base case is that the UK votes to remain, “we devote much time to thinking about the implications of a vote to leave. Of the two competing views on this ‒ that it will be a globally systemic event or that, while important for the UK, its impact on global markets will be contained ‒ we side with the latter. In part this is due to our belief that any negotiations would be long and drawn-out. For one thing, a vote to leave would likely trigger a leadership challenge within the Conservative party. Furthermore, the UK does not even have a trade department that could lead the negotiations. In short, these things would take time!”

Nonetheless, there will likely be material volatility leading up to and around the vote on 23 June, adds Mike Amey. How can investors position for this?

In his portfolios he has been looking to combine positions that may benefit if the UK remains in the EU with those that will mitigate downside risk if it votes to leave. These include:

Buying UK bank bonds: They view the recent underperformance of UK bank bonds as an opportunity, with the subordinated bonds of major UK banks now trading at yields of 8% and above. Whilst there will be mark-to-market volatility in the event of a vote to leave, they do not see a material risk of capital loss.
Maintaining exposure to UK duration: They also see good risk-reward characteristics in five- and 10-year gilts, with the market currently pricing in a 25% probability of a 25-basis-point rate cut this year. With inflation low, they see a very small probability of a hike in the next 12 months regardless of the outcome in June, and in the event the UK votes to leave the EU, they think it likely that the Bank of England would cut the official rate to zero, potentially boosting gilt prices.
Selling the British pound versus the U.S. dollar: For portfolios with less liquid UK assets, or with significant exposure to UK banks, they think the best way to hedge is by selling the pound relative to the dollar. In the event of a vote to leave, they consider a 10% devaluation of the pound against the dollar.

“Clearly the outcome of 23 June can’t be predicted with certainty. However, through a combination of strategies like these, we think portfolios can be structured to potentially benefit in the event that the UK remains in the EU and hedged in the event it takes the alternate path,” he concludes.

The Market Plays a (Fed) Waiting Game

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A dovish Fed and weaker dollar could create space for both wages and profits to rise.

I was invited onto Bloomberg Television recently to talk about my outlook on equity markets, the path for Fed rate hikes, and the U.S. consumer and retail sector. It’s interesting to think about how those three subjects relate to one another. The missing link? It might be productivity.

Wages, Prices and Profits
Last week the latest Global Economic Outlook from The Conference Board projected a fall in U.S. GDP per hour worked of 0.2% this year. That would mark the first year-over-year decline since 1982.

With low productivity growth as the background, it’s extremely difficult to sustain a mix of wage growth, modest inflation and accelerating corporate earnings. Two of the three would seem possible, but not all of them, and since mid-2014 the choice the market has made has been obvious: We’ve had an earnings recession with rising wages, alongside steady, low inflation.

I warned against chasing this market over a month ago, and since then it has crept up to a multiple of around 17 times 2016 projected earnings. On the face of things, it’s not obvious those earnings will materialize. When productivity was growing, rising wages led to more demand, which enabled price increases, wider margins and modest inflation. Today, global competition and a strong dollar have eroded corporate pricing power, leaving us with rising wages, subdued inflation and meager earnings.

Industry Is Struggling Despite High Consumer Confidence
This dynamic helps explain how we got such a disappointing reading from the Richmond Fed manufacturing index last week, at the same time as we got the biggest monthly rise in new home sales in 24 years. These are just the latest in a series of data points drawing a stark contrast between the moods of U.S. industry (which worries about the strong dollar, cheap oil and falling profits) and U.S. consumers (who wield a strong currency to buy cheaper gasoline and stuff to furnish their new homes). Significant shifts in consumption patterns—more online rather than high-street shopping, more purchases of experiences over goods—amplify this dynamic.

If earnings are to recover, either wage growth must slow or inflation, in the form of companies’ pricing power, must take hold. Regular readers may guess where our bias lies. Last week, Brad Tank outlined his expectations for a range-trading dollar and for a while we’ve said that a flat-to-weaker dollar and a firmer oil price were a foundation for earnings recovery. Both would stoke inflation, too.

And that is where the Fed comes in. A dovish second half of 2016 would cement this subdued-dollar, higher-inflation theme.

Recent “Fed speak” does little to support the thesis, apparently softening us up for more than one hike this year. Markets put the probability of a June hike at around 30%, but that’s up from 4% just a couple of weeks ago. The fact that risk assets have taken this in their stride, bank stocks have rallied and gold has sold off might embolden the FOMC.

How ‘Political’ Will the Fed Be?
The consensus on our teams is indeed for two hikes, not beginning in June, but at the September and December meetings. Why not in June? Because we’ll still be waiting on the Q2 GDP print and, lest we forget, the Q1 numbers were very disappointing. Furthermore, the June meeting comes just before the U.K.’s referendum on EU membership—which both the dovish Bill Dudley and the hawkish Robert Kaplan have cited as a reason to hold fire.

It is the question of how “political” the Fed might be that makes me err on the side of fewer rate hikes than some of my colleagues. Without a press conference in July and August, the FOMC risks hiking without being able to shape the message. Then we’re past Labor Day and deep into the clamor of the general election, during which you’d forgive the central bank for sitting on the sidelines.

With these sensitivities to consider, I would not be surprised to have to wait until December for the next hike. That could take some wind out of the dollar’s sails, underpin the ongoing recovery in inflation—and, potentially, free up margins to rise along with wages and place a cushion under today’s equity market multiples.

Neuberger Berman’s CIO insight by Joseph V. Amato

Coelho: “We Are Going to Experience an Important Recovery in Real Estate From the Emerging Markets”

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“The more interest rates stay on zero, the less people know where they should invest money in”, Pedro Coelho, Vice President at Portuguese Real Estate manager Square AM, says in an interview with Funds Society. And, he remembers, “Core Real Estate has given higher return on a historical basis”.

From your experience as a real estate fund manager, what of these two options has more potential in the current environment: direct investment in Real Estate or the investment via traded securities related to the sector?

It depends on the investor expertise and size. If it has expertise and size enough it should get profitable to invest directly. If it has not that expertise and have not so much money (or both) it should invest indirect.

How do the Square’s funds work: are they investing directly? How long have you been investing this way?

Each member of Square AM top management team has more then 25 years real estate experience investing directly. And it has invested successfully in excess 4 billion euros in Real Estate over the past 25 years in Portugal, Brazil, Russia and USA.

Are investors willing to capture the iliquidity Premium of the direct investments? Is this Premium high enough?

The more the premium is getting shorter the less investors stay to pay it.

Income… is one of the reasons that people mention when investing in Real Estate. Are you focusing on income in some or your products?

We have two different types of products: some distress assets funds to make restructuring of Bank balance sheet and we have a income Fund that has 330 M € unlevered. This Fund bet MSCI Index on income every year since 2006 and won the MSCI award as the highest Portuguese portfolio return over the last 5 years (3 of each as Iberian award).

What are the main reasons why people should invest now in the asset class? Are you seeing a increasing interest? Why?

The more interest rates stay on zero, the less people know where they should invest money in. Core Real Estate has given higher return on a historical basis.

Regarding the situation of the market, it seems the real estate market in Europe is not as cheap as it used to be after the crisis (2008-2010). Are you still seeing distressed opportunities in some markets in Europe? What about Spain and Portugal?

There are always distressed opportunities. In South Europe, Bank restructuring is still one of the main trends. In the other countries, although is not a huge problem as it was, due to economic dynamic is always a thing to deal with.

In Spain, in which sectors are the best opportunities? Are you concerned by the political situation?

I would say that for the moment being there a little “on hold” to see what happens after June elections. Although, if we see last results, it could be a good lesson for all politicans. Just a management governement, managing the previous budget and economy growing at 3,5%. Why do we need a true government?

And what about other markets in the world: where are you seeing the best opportunities?

I think we are going to assist at a main recovery from the emerging markets, as they suffered (and their currencies) big depreciation.

The market seems attractive in an low interest rate environment but… if the Fed starts to hike rates… What could be the impact in the asset class? Are you concerned about this?

We should always be concerned about it, but my own view is that we are not going to assist at a hike in FED rates…

In the last years we have seen liquidation and closes in some real estate funds in Spain. After the adjustment, are the remaining funds in a better situation? Could the sector face more problems in the future that could force more closes?

It always depends on the economy and on the management skills, but dynamics also occur in the other asset class like bond and equity funds.

Spanish General Elections… Again

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Christoph Riniker, Julius Baer’s Head of Strategy Research, and his investment team are currently underweighting the Spanish equity market based on the ongoing political uncertainty. As they are assuming that this situation is here to stay for some more time.

The potentially shortest Spanish legislature is bound to come to an end on the 26th of June of 2016, when Spain will elect a new parliament for the second time within six months. Since the politicians have failed to form a new government after the last general election in December 2015, King Felipe VI has dissolved the parliament and called for new elections. The situation after the new elections might not be better than before. Current polls suggest that the outcome will be very similar to the one in December 2015.

According to the most recent polls, the ruling PP might see an unchanged result and the PSOE a noticeable decline. Both new parties, Podemos-IU (recently merged) and Ciudadanos might get more seats in the parliament than after the previous general election in December 2015. However, only minor changes can be expected. Since no party will reach the absolute majority, coalitions will have to be formed. The same problem as in the recent months might therefore emerge but we remain confident that the politicians are aware of that they cannot fail again.

Potential coalitions to think about

On the basis of the above-mentioned expectations there are only a limited number of possible combinations. Expecting the PP to stay in the relative lead, the party might first get the opportunity to build a coalition. The most likely partner according to the political programs would be Ciudadanos. Political reforms already achieved my stay in place and taxes could be reduced while the Catalonian issue might remain a topic of conflict between the two parties.

Should a coalition between PSOE and P-IU be considered, the differences in the Catalonian question would also remain an issue here as the PSOE strongly opposes more authority for the north-eastern region. From an investor’s perspective (be it equities or fixed income) the former combination would be strongly preferred. In both cases the coalitions might not reach the absolute majority and therefore remain dependent on smaller regional parties in the parliament. Last but not least a grand coalition between PP and PSOE could be an option although a collaboration of the traditional antagonists seems impossible at first glance. The only argument therefore can only be external political pressure in order to avoid another failure. Not a promising outlook.

77 Percent of HNW Come From Low- to Moderate-Income Families

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The 2016 US Trust Insights on Wealth and Worth survey recently released found 10 common success traits that create a picture of modern day wealth in America.

“Perceptions of the wealthy in history and popular culture have been painted with a broad brush that doesn’t reflect the majority of financially successful people in society,” said Keith Banks, president of U.S. Trust. “The insights we’ve gained through extensive research over the years give us a more accurate portrait of the modern day wealthy. It’s an increasingly diverse group of men and women of all ages and backgrounds. Their advantage in life is not rare financial privilege but rather basic values, discipline and sense of potential shaped by family from an early age, which equipped them to make the most of every opportunity.”

Based on a nationwide survey of 684 high net worth (HNW) individuals with at least $3 million in investable assets, the 2016 U.S. Trust Insights on Wealth and Worth survey explores who the wealthy are, where they came from, how they built and are sustaining their wealth and what they want to do with it.

When asked what they themselves attribute most to their success, the top three responses were: Hard work, ambition and family upbringing. Through extensive analysis of survey findings, U.S. Trust found these similar characteristics about the wealthy:

They built wealth over time: 77 percent of those surveyed came from middle class or lower backgrounds, including 19 percent who grew up poor. They earned wealth over time, most of it through income from work and investing.  

Basic, long-term approach to investing: 86 percent of HNW investors made their biggest investment gains through long-term buy and hold strategies, traditional stocks and bonds (89 percent) and a series of small wins (83 percent) versus taking big investment risks. Their use of more sophisticated investments grows as their wealth increases.  

Opportunistically optimistic investors: More HNW investors are optimistic than pessimistic about investment returns over the next 12 months. Nearly three in five keep more than 10 percent of their investment portfolios in cash positions, including one in five with more than 25 percent in cash on hand. Their top reason for doing so is for opportunistic purposes, including being in a position to invest on a sudden market downturn or rising trend.

Use credit strategically: Nearly two-thirds consider credit as a means to  strategically build their wealth. Four in five say they know when and how to use  credit as financial advantage.  

Make tax-conscious investment decisions: HNW investors know that real  investment returns are really negative returns if they are gobbled up by taxes. Fifty-five percent agree investment decisions that factor in potential tax implications is better than pursuing higher returns regardless of the tax implications.  

Invest in valuable tangible assets: 48 percent of HNW investors invest in tangible assets, such as farmland, investment real estate and timber properties that can produce income and grow over time with legacy value. One in five collects fine art, including one in three ultra high net worth art collectors who are now using art as an alternative asset class and a core part of their wealth structuring and philanthropic giving strategies.  

Disciplined savers; opportunistic buyers: 81 percent of HNW investors say that investing to reach long-term goals is more important than funding current wants and needs. This disciplined approach to saving and investing was instilled at an early age and becomes easier with the financial freedom that wealth affords.  

Advantage in life is family values and upbringing: Four in five wealthy people came from families where their parents encouraged them to pursue their own talents and interests, but set firm disciplinary boundaries and, for the most part, were tolerant of failures and mistakes along the way. The five family values most strongly stressed during their formative years were: Academic achievement, financial discipline, work participation, family loyalty and civic duty.  

Strong family tradition of philanthropy: 65 percent say there is a strong tradition of philanthropy and giving back to society within their family.  

Marriage is a life-long partnership: 86 percent of the wealthy surveyed are married or are in a long-term relationship. Most stayed married to the same person, avoiding the financial setback that divorce often creates. They tend to divide, rather than share, roles and responsibilities at home, including financial and non-financial contributions to family wealth, such as caretaking for children. Almost all discuss important goals and values about the use of money.

While the survey found common traits across all ages and wealth levels, U.S. Trust also found distinct generational differences suggesting the next generation of young, high net worth millennials is taking its own approach to building and managing wealth. The findings portray millennials are highly optimistic, opportunistic and knowledgeable investors, who are especially entrepreneurial and confident in their ability to improve their own circumstances while making the world a better place for themselves and others.

“It is noteworthy that while the survey uncovered several examples of generational differences, the one common thread that cut across all generations was the importance and impact of family values as key contributors to success,” said Chris Heilmann, chief fiduciary executive of U.S. Trust. “As such, today’s advisors should be mindful of that focus to engage in values based planning conversations with their clients.”

Smart Beta: 3 Things You Should Know About Factor Investing

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Factors are broad, persistent drivers of returns that have been proven to add value to portfolios over decades, in accordance to research data from Dartmouth College. Factor strategies like smart beta capitalize on today’s advancements in data and technology to give all investors access to time-tested investment ideas, once only accessible to large institutions. As factor strategies continue to gather attention, some misconceptions have arisen. We highlight—and clearup—a few here today.

1. Factor strategies are stocks-only.
False. Equity smart beta strategies like momentum, value, quality and minimum volatility are by far the most adopted factor strategies and often serve as the gateway to this type of investing. But it’s important to note that the concept extends beyond equities to other asset classes, such as bonds, commodities and currencies. As an example, fixed income factors are less well known but similarly aim to capitalize on market inefficiencies. Bond markets are largely driven by exposures to two macroeconomic risk factors: interest rate risk and credit risk. One way that bond factor strategies try to improve returns is by balancing those risks.

As investors look for more precise and sophisticated ways to meet their investment goals, we believe we will see more factor strategies in other asset classes, as well as in long/short and multi-asset formats.

2. Factor investing is unnecessary because my portfolio of stocks, bonds, commodities, hedge funds and real estate is well diversified.
Maybe, maybe not. Oftentimes a portfolio is not as diversified as you might think. You may hold many different types of securities, sure, but those securities can be affected by the same risks. For example, growth risk figures prominently in public and private equities, high yield debt, some hedge funds and real estate. So as economic growth slows, a portfolio overly exposed to that particular factor will see its overall portfolio return lowering as a result, regardless of how diverse its holdings are across assets or regions.

Factor analysis can help investors look through asset class labels and understand underlying risk drivers. That way, you can truly diversify in seeking to improve the consistency of returns over time.

3. Factor investing is a passive investment strategy.
Not really. At least we don’t look at it that way. Factor investing combines characteristics of both passive and active investing, and allows investors to retain many benefits of passive strategies while seeking improved returns or reduced risk. So to us, factor investing is both passive and active. While we think traditional passive, traditional active and factor strategies all have a place in a portfolio, it is not news that some of what active managers have delivered in the past can be found through lower-cost smart beta strategies.

For more on factors, follow this link.