Volatile markets to drive institutional investment in active fixed income funds

Written by Adam Cadle

16/01/2023

Volatile markets will drive 94% 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, new global research from Aeon Investments has revealed.

Seventeen per cent of global institutional investors invest under 10% of their total portfolio in active fixed income strategies; 29% invest between 10 and 25%; 34% invest between a quarter and half their portfolio in active strategies; while 20% invest between 50% and 75%.

The research revealed these allocations will decrease dramatically for 13% of investment portfolios; slightly for 81%; while 6% will stay the same.

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

Nearly all (99%) respondents said that fixed income investors are increasingly willing to pay a liquidity premium for a higher yield and greater diversification. Almost three-quarters (74%) of investors said this trend to more illiquid investments will increase slightly over the next two years; 16% expect dramatic increases while one in 10 respondents said the trend will stay the same.

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. More than half (56%) of investors strongly agree with this view while 44% slightly agree.

Given the growing attractiveness of credit opportunities in private markets, almost one-quarter of investors said allocations from institutional investors will increase dramatically over the next three years; two-thirds (67%) believe they will increase slightly; while 8% said they will stay the same.

Evgeny van der Geest, head of capital markets strategies, Aeon Investments 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.”

Aeon Investments commissioned the market research company Pureprofile to interview 100 senior investment managers at pension funds, insurance asset managers, family officers and wealth managers with a total of $544bn AuM. Survey respondents are based in UK, US, France, Germany, Hong Kong, Italy, Sweden, Singapore, Switzerland, UAE, and Saudi Arabia. The survey was conducted online in November 2023.

Related Articles