Bond issuers beware.

Vanguard’s new chief executive Salim Ramji — the former BlackRock executive who became the first-ever outsider to lead the investment giant in July — isn’t wasting time. One of his first priorities for the world’s second-largest asset manager is a new push into the actively managed fixed-income market. The $9.3 trillion firm is looking to bring massive scale to a bond market it says is primed for change. Vanguard has already filed for two active municipal bond ETFs that are slated to go live this year and launched two active bond ETFs in December.

“If you think of the fixed income market today … it’s far more antiquated, it’s far less transparent, far more expensive,” Ramji said at a Financial Times conference last week. “I think there’s an opportunity that Vanguard has to change that dynamic.” 

The Fix Is In

A Vanguardian-sized play for active fixed-income products would likely have a massive impact on the market. Just 10% of Vanguard’s assets are currently in actively managed fixed-income vehicles, according to the FT. The cheapest Vanguard product in the segment costs just 10 basis points, compared to the average active fixed-income exchange-traded fund fee of about 50 basis points. Based on Vanguard’s storied history in the passive indexed universe, a larger push would almost certainly put pressure on fees, and has the potential for major disruption.

“Vanguard and other fixed-income providers have been sidelined for the last few years,” said Monish Verma, CEO of Vardhan Wealth Management. “As rates start to decline, investors who have been predominantly equity investors will now start taking a strong look.”

Pro Active. While equities have been on a tear in recent years, bond instruments have also been pulling in impressive inflows. Money market funds that invest in high-quality, short-term debt and cash equivalents soaked up $106 billion in assets in August alone, hitting record highs. And Gundlach’s famous “T-Bill and chill” game plan looks like it’s still in full effect.

“The change in rates provides a positive opportunity in the fixed-income market,” Verma said. “Investors who have been shy of fixed-income investments will now start to take a second look.”

While not all actively managed funds beat benchmarks, that hasn’t necessarily been the case with active bond products. A new Morningstar report found active fixed income was one of the best-performing categories in recent years, with roughly two-thirds of active bond funds beating a passive counterpart in the trailing year through June. (Wouldn’t have bet on that one.) The research also found:

• Almost 4 in 10 of the funds provided better returns than benchmarks over the past 15 years.
• Active bond funds’ winning rate led all other asset classes over the same period, according to Morningstar.

Private equity’s hunger for wealth management is insatiable.

The massive registered investment advisor Creative Planning announced a PE investment from the buyout firm TPG that could value the Kansas-based wealth manager at a reported $15 billion. Although terms were not disclosed, the deal could be worth as much as $2 billion, according to Reuters. CEO Peter Mallouk will continue to lead the advisory firm and maintain majority ownership.

“We are excited to partner with a trusted investor like TPG … who shares our vision of leveraging our planning-led approach and people-first culture,” Mallouk said in a statement.

Come On In

This isn’t the first PE deal for Creative Planning, which is one of the largest independent advisors in the country and sits on about $375 billion in assets under management. The company sold a minority stake to General Atlantic in 2020. It’s also not TPG’s first foray into wealth management, either: The PE firm took a minority stake in the RIA Homrich Berg last week.

PE firms are often seen as the barbarians at the gates, but in the world of wealth management, it’s getting complicated. In fact, private equity backed all of the wealth management M&A transactions in August, Fidelity reported. Other research has found:

• In the second quarter, PE firms made 12 direct investments in the wealth management space, Echelon Partners reported. 
• Some of the largest deals included Fisher Investments selling a minority stake to Advent International and others for upwards of $3 billion and GTCR taking the turnkey asset management provider AssetMark private.

Don’t Worry, Be Happy: There are some concerns that PE players in wealth management don’t understand the industry. They do, however, understand the industry’s ability for growth. By 2020, the client retention rate among North American firms had reached an all-time high of almost 95%, according to McKinsey & Company. And when those clients stick around, they pay plenty of advisor fees. 

To be sure, many advisors welcome buyouts and say the more investments in the industry, the better. Such deals can also help professionalize a firm, enhance governance, and provide more capital for scaling.

Money market funds have been around since the 1970s, and ETFs since the ‘90s — but it took until last week to bring them together.

Dallas-based Texas Capital launched the Government Money Market ETF (MMKT), which will tap the $6.4 trillion money market space while providing the liquidity of ETFs — the company says it’s a first-of-its-kind approach. It’s also tapping serious interest in money market funds that added $121 billion in inflows during the week ending Sept. 25 alone, a record for total assets, according to the Investment Company Institute.

“There was a wake-up call, as people had money in checking accounts, not earning any interest at all,” Texas Capital head of corporate and investment banking Daniel Hoverman told The Daily Upside. “They realized there’s an opportunity cost for not getting into a money market fund or buying a Treasury bill.” 

Similar But Not Congruent

There are plenty of ETFs that deal in short-term government bonds and Treasury bills, but there is a slightly weedy difference when it comes to MMKT in regard to obscure Securities and Exchange Commission definitions. The fund is the first to follow Rule 2a-7 of the Investment Company Act of 1940, Hoverman said. That rule requires that after the acquisition of an asset, a money market fund must hold at least 10% of its total assets in daily liquid assets and at least 30% of its total assets in weekly liquid assets:

• MMKT carries an expense ratio of 20 basis points, and it will invest 99.5% or more of its total assets in cash, government securities, or repurchase agreements with maturities of up to 13 months, according to filings with the SEC.
• However, MMKT won’t maintain a net-asset value of $1 per share like money market funds. Instead, the fund will calculate its NAV per share based on the market value of its investments.

“We’ve had clients say, ‘I would really like to buy this stock today, but I’m in a money market, and there’s an opportunity cost,’” Hoverman said.

Future of Money Markets: Most folks shudder when they hear of raising interest rates, but those hikes tend to benefit money market funds. Even though the Fed cut rates by 50 basis points on Sept. 18, Hoverman doesn’t expect the explosive growth in money market funds to slow for some time. 

“Even as rates go down toward 4%, that’s still real money relative to having that cash in an interest-bearing account,” he said. “I don’t see us cutting rates back down to zero, so deploying your money intelligently will remain important.”