Global Institutional Investors And Wealth Managers May Be Missing Out On Fixed Income Returns, New Research Reveals
Ninety-two percent of institutional investors and wealth managers believe ongoing market volatility and the prospect of recession will make fixed income more attractive than equities over the next two years, with one-fifth saying the difference will be dramatic.
New research from Managing Partners Group (MPG), the international asset management company, which surveyed institutional investors and wealth managers worldwide with assets of €245 billion under management*, found just seven percent expected fixed income to retain its current relative attraction next to equities, and one percent say the asset class will become less attractive than stocks.
However, 15% of investors and wealth managers say they are very under-exposed and 54% reveal they are slightly under-exposed to fixed income, which is offering the highest yields since the global financial crisis hit in 2008. Just over a quarter (26%) say they have the right level of exposure to fixed income, and five percent say they are overexposed.
When asked what the top reasons are for holding allocations to fixed income, institutional investors and wealth managers selected a predictable income stream, followed by the return on capital, diversification benefits, and then the fact that bonds are lower risk than equities.
When asked how they expect pension funds to change their allocations to different fixed income asset classes over the next 24 months, most respondents say holdings in investment grade bonds will increase.
More than a quarter (28%) of institutional investors and wealth managers expect dramatic increase to US investment grade, while 53% predict slight increase. Eighteen percent say allocation will stay the same and one percent expect a decrease.
For European investment grade bonds the predictions for increases were even higher. Forty-five percent expect dramatic increases and 42% say there will be slight increases. Nine percent forecast allocations to European investment grade debt will remain static, while two percent see them falling.
Similarly for Swiss investment grade debt, 41% predict dramatic increases; 40% slight increases; 17% say they will stay the same and one percent believe they will decrease.
Meanwhile allocations to non-investment grade debt, which is higher risk while offering the potential of higher yields, are less in favor.
Nearly one-fifth (19%) of respondents believe allocations to US non-investment grade will increase dramatically; 27% say slight; while 35% predict them to stay the same; and nine percent say they will fall.
Fifty-six percent of respondents believe European non-investment grade will rise with 17% predicting dramatic increase. Thirty-one percent say they will stay the same and 10% predict allocations to reduce.
Finally, institutional investors and wealth managers say allocations to Swiss non-investment grade credit will increase 21% expecting dramatic increases, 39% say slight. More than a quarter (26%) say they will stay the same and 11% predict a fall in allocations.
The MPG’s Melius Fixed Income Fund which invests in corporate, high yield and inflation linked bonds, has returned 7.04% in the 12 months to July 2023 outperforming the iShares Core US Aggregate Bond benchmark by 10.78% over the period, benefiting from an exposure to fixed income in the USA, UK, Europe and Switzerland. Melius has a yield driven investment strategy that carries less pricing sensitivity to interest rate movements.
Jeremy Leach, Chief Executive Officer at MPG, said: “Bond markets suffered a bloodbath in 2022, with the value of global bonds falling by more than 30%; their worst performance in over 200 years, so it is understandable some investors have been under-exposed to fixed income. But as yields return to their highest levels for a decade and a half, and equities continue to look volatile with a recession on the horizon, it could be time to consider increasing allocations to bonds.”
About the Melius Fixed Income Fund
Melius Fixed Income Fund is a regulated mutual fund that aims to achieve an attractive level of growth whilst respecting risk diversification. The objective of the fund is to maximise total returns consistent with preservation of capital and prudent investment management. In seeking to achieve
its investment objectives, the fund will aim to outperform its benchmark, the iShares Core US Aggregate Bond (AGG) over a rolling 3-year period by concentrating in a yield driven strategy that carries less pricing sensitivity to interest rate movements.