Majority of institutional investors to increase fixed income allocations

Market volatility is expected to push the majority (94 per cent) of global institutional investors and wealth managers to increase investment in active fixed income funds over the next two years as they seek to manage risk and drive returns, research from Aeon has found.

The research, which gathered views from pension schemes, insurance asset managers, family offices and wealth managers, found that 17 per cent of respondents currently invest under 10 per cent of their total portfolio in active fixed income strategies.

Over a quarter (29 per cent) invest between 10-25 per cent, while 34 per cent invest between a quarter and half their portfolio in active strategies, and 20 per cent invest between 50-75 per cent.

However, these allocations are set to increase "dramatically" for 13 per cent of investment portfolios and slightly for 81 per cent, while 6 per cent will stay the same.

In terms of current return expectations, 4 per cent said they look for 3 per cent or less from their fixed income allocations; 55 per cent target 3-5 per cent; more than a third (36 per cent) aim for 5-7 per cent; while 5 per cent expect between 7 per cent and 10 per cent.

However, the research found that nearly all (99 per cent) respondents felt that fixed income investors are increasingly willing to pay a liquidity premium for a higher yield and greater diversification.

Looking further ahead, almost three-quarters (74 per cent) of investors said that they expect this trend to more illiquid investments to increase slightly over the next two years, with 16 per cent predicting a dramatic increase.

More broadly, Aeon found that current market conditions are also driving institutional investors to look for fund managers that have a broader mandate which enables them to invest in several credit markets, with more than half (56 per cent) of investors strongly agreeing with this view, while 44 per cent slightly agree.

Given the growing attractiveness of credit opportunities in private markets, almost one-quarter (24 per cent) of respondents said allocations from institutional investors will increase dramatically over the next three years, while more than two thirds (67 per cent) believe they will increase slightly.

Commenting on the findings, Aeon Investments head of capital markets strategies, Evgeny van der Geest, said: “The past two years have been quite a ride for fixed income investors, and it makes sense that they are willing to trade liquidity for higher yields and greater diversification.

“At the same time, looking for managers with experience across a variety of fixed income classes and that engage a robust bottom-up credit investment process has real value in the current markets.”

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