Nearly one quarter of professional investors expect dramatic levels of de-risking

Written by Adam Cadle

20/06/2023

Almost a quarter (23%) of professional investors, including insurance asset managers, expect a dramatic level of de-risking to occur over the next couple of years, due to higher expected bond yields/yields from fixed income and a fall in expected equity returns.

Research published by Aeon Investments said 13% of investors believe there will be a decline in investors looking to de-risk and 6% predict no change.

However, investors do not see investment in fixed income as without risk, with almost half (48%) saying inflation presents the biggest threat. More than a quarter (28%) say interest rate risk is the biggest threat, with 18% perceiving credit risk as the number one issue. Just 6% say liquidity is the primary risk.

Of the four main risks facing the private debt market, professional investors see inflation risks as the most likely to increase over the next two years. Two-fifths (41%) say there will be a dramatic increase in inflation risk while 38% say it will be slight.

One-third of investors believe credit risk will increase dramatically while 30% expect a slight increase. Around a quarter believe interest rate risk will increase dramatically while two-fifths (42%) say it will increase slightly. One in ten say interest rate risk will decrease over the next two years.

Less than a quarter (23%) say liquidity risk will increase dramatically while 46% predict a slight increase. Twenty-four per cent say liquidity risk will stay the same and 7% expect it to decrease.

Khalid Khan, head of portfolio management at Aeon Investments, said: “It makes sense that investors expect to decrease their exposure to equity markets over the next two years given that equity markets are significantly more vulnerable in a world transitioning away from quantitative easing and extraordinary monetary policy. Fixed income, given the contractual nature of returns, offers an attractive alternative for investors seeking not only resilient, but increasingly attractive income flows. Historically, fixed income markets have recovered far quicker from drawdowns than equities since the “pull to par” effect (as bonds reach maturity) tends to cushion the impact of price falls and aid recoveries.”

Aeon Investments commissioned the market research company Pureprofile to interview 101 senior investment managers at pension funds, insurance asset managers, family officers and wealth managers with a total of $545bn AuM. Survey respondents are based in UK, US, France, Germany, Italy, Switzerland, UAE, and Saudi Arabia. The survey was conducted online in April 2023.

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