State Street Global Advisors, the asset management business of State Street Corporation, has published the results of a global survey of institutional investors on how they view the fixed income market and how they are allocating their investments amid the ongoing market volatility.
According to the survey report, The Future of Fixed Income, many investors are adding private credit investments alongside their public fixed income allocations. Additionally, they are showing a growing appetite for new, systematic fixed income strategies to help combat the impact of rising prices. The findings are based on a global survey of 700 pension funds, endowments, foundations and sovereign wealth funds, as well as wealth and asset managers.
“Our research confirms that with the dramatic rise in yields, investors are concerned about how to balance risk and return within their portfolios, leading them to look beyond traditional public fixed income investments,” says Gaurav Mallik, chief portfolio strategist for State Street Global Advisors. “Now is the time for institutional investors to be strategic with their allocations, and they are finding increased opportunity to pair private assets with liquid publicly traded exposures. As investors navigate this volatile time, we are well-positioned to help them access these new approaches, meet their key objectives and manage their allocations and flows.”
This year’s findings also reveal that fee pressure and increased transparency are leading investors to embrace index-tracking investments as a way to gain efficient access to attractive sectors. For many investors, allocations are changing and a balanced approach of active and index investments is gaining traction.
“Institutions are embracing active and index fixed income ETFs at an accelerating pace to optimise their portfolio’s asset allocation and liquidity in this challenging market environment,” says Bill Ahmuty, head of the SPDR fixed income group at State Street Global Advisors. “As the fixed income market has evolved, some of the structural inefficiencies that were historically sources of outperformance have eroded, which has increased demand for index-based investments. However, there are still opportunities for active managers to add value, especially those with deep sector knowledge and credit skills in specific segments of the credit and loan markets.”
As markets remain volatile and a recession looms, investors are intensifying their consideration of alternative sources of return. This change of approach by investors impacts how traditional sectors are viewed, adds increased liquidity risk into the equation, supports the rise of systematic strategies and may disrupt some longstanding preferences for active approaches. The report found that:
As investors respond to the current market and consider their portfolio duration, respondents are especially interested in increasing allocations in bank loans (51 per cent) and inflation-linked bonds (42 per cent) over the next 12 months.
Around one-third of investors (31 per cent) elected to reduce their traditional fixed income allocations in favour of alternatives over the last nine months, and a further 29 per cent plan to do so over the next 12 months. Those seeking returns in alternatives outnumber those going to cash.
While only 14 per cent of respondents globally increased their allocations to fixed income in the last nine months, more respondents (19 per cent) say that they are planning to increase allocations over the coming year.
Investors are showing interest in new, data-driven approaches to fixed income via systematic strategies. More than half (59 per cent) of investors exploring these strategies say they are planning to use them to replace existing active strategies.
Indexing Cements Its Place
Indexing’s ability to capture the full performance potential of even the most complex fixed income exposures, in a highly cost-effective way, means that active management is no longer the default choice for fixed income investors. The survey found that:
Over one-third (37 per cent) of respondents say that more than 20 per cent of their fixed income portfolio is allocated to index strategies. For larger investors (those with AUM over USD10 billion), this figure increases to 57 per cent.
46 per cent of respondents agree that they’re “under a lot of pressure to make more efficient use of fees” in fixed income.
More than two-thirds (76 per cent) of respondents are not planning to make meaningful changes to their balance of index and active strategies in the next 12 months. Among those who do expect to make a change, more will meaningfully increase their overall fixed income allocation to index (14 per cent) than to active (10 per cent).
For survey respondents who plan to increase allocations to inflation-linked bonds, a majority plan to use indexed approaches.
ESG Tops the Fixed Income Agenda for Certain Investors
ESG emerged as a top priority for certain institutional investors, overtaking managing the effects of inflation and rising rates. The report found that:
More than one-third (39 per cent) of respondents say integrating ESG considerations is the most important priority to address through their fixed income allocations over the next 12 months.
Nearly half of investors have integrated ESG factors within high yield corporate credit (47 per cent). Investment-grade credit (44 per cent), emerging market debt, and sovereigns (each 41 per cent) are also making good progress, but securitised debt (27 per cent) continues to pose a challenge.