FI investors set sights on alternative sources of returns

Oksana Patron

6 October 2022

The fixed income investors are intensifying their search for the alternative sources of return in the face of rising inflation and market volatility, with a growing shift towards private markets and a new appetite for systemic FI approaches.

The State Street’s annual survey of the fixed income market, which included 700 global institutional investors, found that while in the short term investors remained focused on adapting their portfolios to the inflation and rate hikes, the new trends shaping the future FI market emerged.

These included adding private credit investments, alongside the public FI allocations, into their portfolios and embracing index-tracking investments as the new way to gain access to attractive sectors.

According to the survey, instos also showed a growing demand for index fixed income exchange traded funds (ETFs) as the FI market evolved and some of the structural inefficiencies that were historically sources of outperformance eroded.

“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,” Bill Ahmuty, head of the SPDR fixed income group at State Street Global Advisors, said.

On top of that, the report found that investors increased their allocations in bank loans (51%) and inflation-linked bonds (42%) over the next 12 months. Of those planning to increase allocations to inflation-linked bonds, a majority said they intended to use indexed approaches.

Following this, around one-third of investors decided to reduce their traditional fixed income allocations in favour of alternatives over the last nine months, and a further 29% plan to do so over the next 12 months.

Also, more than 59% of investors exploring data-driven approaches to fixed income via systematic strategies declared they were planning to use them to replaces existing active strategies.

“Indexing’s ability to capture the full performance potential of even the most complex fixed income exposures, in a highly cost-effective way, means that active management is no longer the default choice of fixed income investors,” the study said.

At the same time, the environmental, social, governance (ESG) topped the fixed income agenda for certain investors, overtaking managing the effect of inflation and rising rates, as more than one-third (39%) of respondents said integrating ESG considerations was the most important priority to address through their fixed income allocations over the next 12 months.

Nearly half of investors also integrated ESG factors within high yield corporate credit (47%).

“Investment-grade credit (44%), emerging market debt, and sovereigns (each 41%) were also making good progress, but securitized debt (27%) continued to pose a challenge.”