Viewpoints | Advyzon

Past performance does not predict future results
(But it's still pretty useful)

Written by Advyzon Team

With 2022 firmly in the rearview, advisors and investors are starting to regroup around 2023. So we asked Brian Huckstep, Chief Investment Officer at Advyzon Investment Management (AIM), to share his forecast for the year now that we have a January rally and one rate hike under our belts.

Equities: A lesson from past performance

Huckstep’s forecast for equities can be boiled down to a range: 5-15%. He sees stocks closing the year higher, somewhere in that range. He’s quick to add a cautionary note to his forecast, however—and really, to anyone’s forecast. One-year outlooks, he says, can be a bit hit or miss.

“It’s a very short part of a market cycle, and it’s hard to forecast,” he said, before adding, “Your confidence over short cycles is always much lower than your confidence over long cycles.”

The takeaway?

Emphasize long-term trends when speaking with clients. Many advisors laid this groundwork in 2022 to help contextualize the sell-off. You may want to continue that narrative even as markets rally. This allows you to re-focus your conversations onto goals and planning versus the latest market headlines, even if those headlines are positive.

As far as what history tells us, Huckstep points out that roughly one out of every four years is negative. There have only been three times that the stock market fell two years in a row. “The majority of the time, the market bounces following a bad year,” he noted.

And the fundamentals this year look better: “Valuations are much more reasonable than they were one year ago.” You might also remind your clients that the earning potential of each share doesn’t change when the share price falls, particularly last year when interest rates were the main factor driving prices down.

Bonds: Focus on yield

These days, the financial services world—particularly market-makers and speculators—tends to focus on bond price versus yield. Advisors, who often rely on total return funds for their bond market exposure, must stay alert regarding price, too. Paper losses may feel very real to clients, particularly those nearing retirement.

Huckstep’s recommendation, however, is to keep your clients focused on yield. “Prices for stocks are unpredictable. Prices for bonds are unpredictable. Yields are very, very predictable,” said Huckstep, before adding, “That’s the easy part of our job as investment managers.”

For a data point, Huckstep references the benchmark Bloomberg U.S. Aggregate Bond Index. While it fell 13% in 2022, that drop was a result of 2.5% yield combined with a 15.5% price drop. In an income portfolio in particular, that yield is what matters.

As far as what to say to investors who seem concerned about paper losses, Huckstep suggested highlighting that it’s the sale of an investment that makes a loss official: “It is truly just a paper loss until you sell a security and you realize the loss. Until you chicken out and move to cash, you haven’t truly lost anything.”

Alts, alts baby

Ever since stocks and bonds decided to stop, collaborate, and…move in a semi-correlated manner to the downside, alternative investments have been a focal point for retail investors looking for safety. But that doesn’t mean alts paint a simple picture for advisors or their clients.

For starters, Huckstep points out that when clients ask about alternatives, it’s a good idea to sus out what they consider alternative investments to be. You may want to explain some of the different options available to them.

“You can have commodity funds, you can have direct real estate, you can have gold; there are a lot of different types of alternative investments,” Huckstep recapped before adding a big cautionary note around one of the most commonly used alternative categories.

“I really, really dislike liquid commodity investments [over the long run],” he said. This is tied to the way commodities are priced, particularly futures contracts:

I remember when commodity futures funds used to have positive returns. And then it became a very popular asset class, and tons of institutional money flooded in. And what happened is rolling yield became negative for a lot of commodities. And that is a very important component of liquid commodity fund returns. And so, you know, if you’re very careful about your future forecasts, you can pick up on that and you can add together the collateral yield, the rolling yield, and spot price change, and you can determine an expected future return that’s negative for liquid commodities in a lot of those spots.

Or, put more simply to help you explain commodities to clients: “The largest portion of price change with commodities is what we call the spot price change. It’s what those commodities earn in the market. And what goes up comes back down. We’ve seen it through so many cycles. Energy prices gyrate from $20 a barrel for oil to $40, then to $20, then to $40 [as an example]. It never just keeps going to the moon.”

Instead, Huckstep suggests looking at other alternatives, including private equity and direct real estate, which tend to have more predictable yields.

For instance, while inflation triggered higher interest rates that drove up the yield on real estate investments, the energy prices responsible for inflation have since fallen drastically, making an energy-driven commodity fund a more uncertain play in 2023 than a real estate investment.

What this means for your clients

While your advice to clients will undoubtedly reflect your personal outlook for the markets and their individual circumstances, we hope some of the data points and takeaways in here help make those explanations a bit easier.

Our goal is to take the hassle out of investment management, whether that’s by creating a seamless all-in-one experience for reporting, CRM, and billing; removing the stress from bulk rebalancing and portfolio builds via Quantum; or full-service asset management through AIM.

Questions on how we can help streamline this part of your practice? Set up a demo to see for yourself!

Advyzon Investment Management LLC ("AIM") is a registered investment adviser registered with the United States Securities and Exchange Commission, and a wholly-owned subsidiary of yHLsoft Inc., doing business as Advyzon ("Advyzon"). All references to investment advisory services mentioned in any correspondence are provided by AIM, while some technology and administrative support services are provided by Advyzon. AIM's advisory services are available to financial advisers for use in managing assets for their clients. We do not provide advisory services directly to retail investors.
Written by Advyzon Team