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By Rene Casis - February 5, 2019
Moving forward into 2019, I'm focused on three main themes: inflationary concerns, rising interest rates and increased volatility. I'll have my sights set on how those issues affect the markets—as well as what they mean for advisors during the portfolio construction process. It's likely, in my opinion, that they'll mean increased client demand for exchange-trade products, or ETFs, and active management. Why? Watch my quarterly insights video for more.
As we enter into the next phase of the economic cycle, we perceive that clients are going to increase their demand for actively managed strategies, and in particular in exchange-traded products.
2018 was a very interesting year in that we saw continued interest in adoption into smart beta products.1 The trajectory for these types of an investment style continues to be of interest to clients—especially in a year like 2018 where we observed higher volatility particularly in the latter part of the year. Certainly, we saw continued flow into exchange-traded products or ETFs that were more focused on traditionally market cap-weighted strategies really because they tended to be more lower cost.
Looking back at 2018, where we saw volatility rise, and choppers U.S. markets, investors are starting to look more towards alternatively weighted, more thoughtfully constructed portfolios. That also includes more actively managed strategies as well.
Moving forward into 2019, we're going to be focusing our time on three main themes: inflationary concerns, rising interest rates and increased volatility. And particularly not only how they impact fixed income, but also how they impact the equity markets as well.
We believe that advisors are going to have to be more thoughtful about the portfolio construction process behind exchange-traded funds, that they're using in their products. Lower costs will certainly be on top of their minds, but we also believe that as we are experiencing more volatile markets, active management and more thoughtful portfolio construction, it's going to play a much bigger role in the decisions that advisors are making when they're considering increasing their usage of ETFs in their portfolios.
What I'm very optimistic about is the increased integration of big data and AI (artificial intelligence) into the investment process end-to-end, from strategy creation all the way through the investment operation and execution processes. I'm also very optimistic about the integration of environmental, socially responsible and governance, or ESG, into many aspects of investments, not only in equities but also seeing that come to light into fixed income.
Coming into 2019, one thing that will be on top of my mind is working to help advisors think through how they respond to changing market conditions in 2019 in terms of the types of strategies that they're selecting, but also the types of vehicles that they're using to implement their views in a more thoughtful way.
Here at American Century, we are looking to differentiate ourselves in the ETF space by taking the core fundamental approach to investing and combining that with a quantitative approach to risk management in order to create a portfolio—whether it be equities, or bonds, in such a way that has a thoughtful portfolio construction that builds resiliency to help achieve outcomes that our clients expect.
1 Smart beta refers to an investment style where the manager passively follows an index designed to take advantage of perceived systematic biases or inefficiencies in the market.
As advisors consider the use of ETFs in volatile markets, will active management and thoughtful portfolio construction begin to play a bigger role?
February 5, 2019
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.