Private credit and EM debt are in focus as government and corporate bonds offer unsatisfactory returns
Fixed income assets are unlikely to disappear from the portfolios of Canada’s institutional investors, but diversification is key.
That’s one of the main findings of a new report commissioned by AGF Investments which shows that government and investment-grade corporate bonds may not provide the best returns.
Adding alternative assets such as private credit and emerging markets (EM) debt offer potential higher returns as asset owners look to manage volatility (67-88%), diversify away from equities (67-74%) and preserve capital (50-65%).
While interest rates are rising, the generally low-rate environment is not expected to change despite tightening central bank policy, and respondents continue to see fixed-income as important to income generation as a result.
The report, conducted by Coalition Greenwich, also discovered that institutional investors’ favoured play for potential higher yields are core plus strategies that typically invest in a mix of government and investment-grade corporate bonds that are complemented by smaller allocations to high-yield, global and EM debt.
Four in ten respondents said that private debt was their preferred option for higher yield and the diversification that it brings to a portfolio. Public and private pension plans are particularly likely to favour this.
While ESG is considered an important factor to integrate into investment processes and portfolios, respondents said this is still at an early stage for fixed-income assets and they expect adoption to be slow.
Managing risks
However, in chasing higher yields, asset owners are aware that there are risks associated with alternative asset classes.
To mitigate risk they are seeking the most knowledgeable and experienced asset managers with team composition and capabilities (4.55 out of 5) and length of track record (4.23) considered vital qualities of a fixed-income manager.
The study polled 31 corporate pensions, public pensions, and endowments and foundations based in Canada.
.@CoalitionGrnwch study commissioned by @AGF shows 🇨🇦 #institutionalinvestors recognize a need to diversify into new sources of #yield amid the current low interest rate environment.
— AGF (@agf) May 25, 2022
Read the White Paper ⤵️ https://t.co/onrJJ8CdzI pic.twitter.com/FReifHIYlb
