A survey of institutional investors by State Street Global Advisors has revealed an increase in the search for new sources of return amid market volatility and looming recession.
For its survey, State Street gauged the views of 700 global institutional investors on the fixed-income market, including 28 based in Australia and 110 across the Asia-Pacific region.
Globally, bank loans in particular were said to be in demand as institutional investors respond to the rising rate environment and consider their portfolio duration, with 51 per cent planning to increase their allocation to the sector over the next year.
In the current high inflationary environment, inflation-linked bonds were also highlighted as a preferred sector by 42 per cent of the investors surveyed.
Moreover, 31 per cent said they have reduced their traditional fixed income allocations in favour of alternatives during the past nine months, and a further 29 per cent plan to do so in the next 12 months.
State Street also reported that the number of institutional investors seeking returns in alternatives has outnumbered those going to cash.
According to the firm, many investors are adding private credit investments alongside their public fixed-income allocations, with a growing appetite for systematic fixed-income strategies to help offset the impact of rising prices.
“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,” commented State Street Global Advisors chief portfolio strategist, Gaurav Mallik.
“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.”
Meanwhile, fee pressure and improving transparency in fixed income markets were found to be driving investors to embrace index-tracking investments in order to gain efficient access in sectors where they are increasing their exposure.
Around 37 per cent of all respondents, and 57 per cent of those with assets above US$10 billion, said that more than 20 per cent of their fixed-income portfolio was allocated to index strategies.
Head of the SPDR fixed-income group at State Street Global Advisors, Bill Ahmuty, noted that active and index fixed-income ETFs were being adopted by institutions at an increased pace as they look to optimise their portfolio’s asset allocation and liquidity in a challenging market environment.
“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,” he said.
“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.”
The survey also found that 39 per cent of investors believe that ESG considerations are the most important priority to address through their fixed income allocations in the next year.
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.