Survey reveals the strategies and asset allocations being deployed by institutional investors amid current market volatility
Some of the world’s biggest investors have been sharing their fixed income strategies as they navigate ongoing market volatility.
A new survey from State Street Advisors polled 700 global institutional investors responsible for asset-allocation decisions for top pension funds, wealth managers, asset managers, endowments, foundations and sovereign wealth funds.
It found that many are adding private credit investments alongside their public fixed income allocations while index-tracking investments are being used as a way to gain efficient access to attractive sectors amid greater focus on transparency and fee pressure.
Read more: British Columbia pension fund expands private credit investments
“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,” said 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.”
Over one-third of respondents say that more than 20% of their fixed income portfolio is allocated to index strategies (57% among larger investors (those with AUM over US$10 billion)).
However, more than three quarters of respondents are not planning to make meaningful changes to their balance of index and active strategies in the next 12 months.
“Institutions are embracing active and index fixed income ETFs at an accelerating pace to optimize their portfolio’s asset allocation and liquidity in this challenging market environment,” said 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.”
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Seeking alternatives
Alternative investments are increasingly part of the story as institutional investors seek returns.
These include boosting allocations to bank loans (51%) and inflation-linked bonds (42%) over the next 12 months.
Those seeking returns in alternatives outnumber those going to cash.
Reduction of traditional fixed income allocations over the past nine months was seen in one third of respondents and 29% intend to do so in the coming 12 months. While only 14% of respondents globally increased their allocations to fixed income in the last nine months, more respondents (19%) say that they are planning to increase allocations over the coming year.
New data-driven approaches to fixed income are gaining interest. More than half of respondents exploring systemic strategies say they plan to use them to replace existing active strategies.
ESG priority
Integrating ESG criteria into their fixed income allocations is a priority for 39% of respondents and many have integrated ESG factors within high yield corporate credit (47%), investment-grade credit (44%), emerging market debt, and sovereigns (each 41%), but securitized debt (27%) continues to pose a challenge.a
