Fixed income has long been a core component of bank clients’ portfolios, given its lower volatility, consistent income stream, and uncorrelated returns relative to the stock market.

In view of the ongoing pandemic, bank advisers have shown stronger demand for products that provide protection against near-term price volatility and broader diversification benefits in the long term.

As such, asset managers that can help them navigate the complex fixed-income markets and demonstrate a consistent track record of helping clients generate income and reduce overall portfolio volatility will stand to benefit in the current market environment, Cerulli Associates says.

Alternative asset classes are also becoming more attractive to bank advisers, with many expecting to increase their allocations to private equity, hedge funds, and non-traded real estate investment trusts during the next two years.

ETF performance

The uncertain outlook for equity and bond markets in the coming years has benefited both private-equity and hedge funds, which high-net-worth investors have long relied on to generate outperformance and diversify risk exposure from equity markets.

Bank advisers are also increasingly interested in exchange-traded funds (ETFs). Nearly three-quarters (71%) of bank advisers report that performance is the most important factor when selecting ETFs, followed by expense ratio (62%) and daily trading volume (57%), according to the latest edition of Cerulli Edge.

“Given the ETF vehicle’s inherent advantages of scalability, low cost, and tax efficiency, they have become a core building block for clients’ portfolios across banks’ advisory platforms,” says Cerulli research analyst Chayce Horton.

A growing number of advisers are incorporating active ETFs within their fixed-income allocations, and in doing so are reducing overall portfolio costs for their clients compared with using individual bonds.

“As bank advisory teams demonstrate continued demand, there is a clear opportunity for asset managers to further educate advisers about the benefits of active ETFs within their clients’ portfolios,” Horton says.

Long-term portfolios

With the path of the pandemic and global market uncertain, there remains an opportunity for active managers to reassert themselves and outperform passive, index-tracking strategies.

“While certain market conditions will cause some active managers to underperform at times, the majority of bank advisers have designed long-term portfolios that combine aspects of both active and passive,” he says.

“As such, asset managers should remain product- and vehicle-agnostic and be prepared to position both actively managed funds and passive strategies to banks’ home offices across a wide range of asset classes and portfolio objectives.”