Sunday, October 28, 2018

The Asset Allocation Decision Faced by Investors - A Discussion by Jim Bianco

Jim Bianco - Marquette Alumnus and Friend of the AIM Program -  Recently Discussed the Asset Allocations Challenge Faced by Investors


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Jim Bianco, President and Macro Strategist at Bianco Research recently explained why the biggest issue in the market today is the asset allocation decision in light of the regime change between stocks and bonds. 

Here are details provided by Bianco Reserch about the 400,000 US wealth managers representing 36 million accounts who are struggling with this changing landscape.

Jim Bianco talked about the changing stock/bond relationship which might be undergoing a regime change that will leave many investors in 60/40 stock / bond  portfolios frustrated. He detailed the size of wealth management community that must deal with the changing relationship between stocks and bonds:


·         The US. has over 12,000 investment adviser firms. They employ over 400,000 people offering investment advisory services.
·         Over 35 million investors use investment advisers whose assets recently topped $70 trillion.
·         88% of investment advisers currently use or recommend ETFs for their clients. No other investment vehicle has a higher usage, not even cash (83%)!

A large number of these nearly 36 million investors are not aggressive and seek both capital appreciation and preservation, hence the popularity of the 60/40 portfolio. It is thought this is more conservative than owning stocks outright since stocks and bonds were negatively correlated.


Every year TD Ameritrade Institutional surveys roughly 300 Registered Investment Advisers (RIAs) who have an average of about $160 million in assets. The chart shows the typical asset allocation among respondents in 2017 (blue) and 2018 (orange). If you add fixed income and cash together, you essentially arrive at a 60/40 portfolio. 

As noted above, 88% of RIA’s listed ETFs as the most popular financial instrument they would recommend to their clients. Since they have 36 million clients in an asset allocated portfolio, the next chart should come as no surprise. It shows ownership in the ETF market. 

2017 Deutsche Bank study found half of all ETFs were owned by accounts directed by investment advisers (blue) or private banking/wealth managers (orange). 41% of ETFs are owned by individuals directly (brown). 


The chart below shows the most popular reason RIAs use ETFs is for asset allocation purposes. In other words, ETFs offer a simple means of creating the 60/40 portfolio. The second highest reason for using ETFs was cost. They offer the cheapest way to construct the 60/40 portfolio.   


Given all this, it should come as no surprise that the yearly flows in ETFs closely match the TD Ameritrade Institutional survey. The first chart below compares survey results (blue) with actual flows (red) in 2017 while the second chart compares survey results (orange) with actual flows (green) in 2018. ETFs are a market driven by RIAs/wealth managers.