TORONTO, Jan. 29, 2018 /CNW/ - Invesco today released its first-ever Global Fixed Income Study, an in-depth report on the investment behaviour of fixed-income investors. The study, conducted face-to-face among 79 fixed-income specialists and CIOs across North America, EMEA and Asia-Pacific, shows 58% of the fixed-income investors interviewed believe the global economy is on the path to recovery, but not via the typical normalization process that has historically occurred after an economic slump.
According to the study, North American investors no longer fear that inflation will accelerate as a result of quantitative easing. Instead, the majority expects moderate growth and little inflation risk.
"The big risk for investors is that they are underestimating inflation risk in a strong global economy," says Rob Waldner, Chief Macro Strategist at Invesco.
An appetite for alternatives
The study also uncovered that there is a strong appetite for alternative credit, such as bank loans and real-estate debt.
"The range of sub-asset classes within fixed income has grown significantly over recent decades and now spans a broad range of diverse investments to include bank loans and real estate," Waldner says. "While traditional core fixed-income assets continue to play a foundational role in many fixed-income portfolios, alternative credit is expected to increase in institutional fixed-income investors' portfolios."
On average, the investors interviewed allocate 19% of their fixed-income portfolios to alternative credit strategies, with the largest appetite in North America at 26%. Larger investors (those with AUM greater than US$15 billion) typically have higher allocations to alternative credit than smaller investors, which are not able to exploit alternative credit strategies to the same extent as their larger peers.
Alternative credit provides fixed-income investors with the opportunity to diversify portfolios away from traditional return drivers, such as rates and term, towards alternative drivers, such as illiquidity and manager skill, as well as to pursue absolute-return strategies unconstrained by traditional benchmarks.
A return to core bonds
Over the past three years, investors have been reducing allocations to core fixed-income portfolios; however, the majority of investors surveyed (63%) expect to rotate back towards core fixed income over the next three years, funding this predominantly from equity portfolios.
Investors still expect to allocate to alternative credit but at slower rates as appetite becomes constrained by higher prices and a reduced set of opportunities.
One area of alternative credit which remains notably in favour is emerging-market debt. While respondents currently allocate 3% on average, 29% of them expect to increase this allocation over the next three years. Investors believe there are opportunities here because of the improving economic fundamentals, shrinking current-account deficits and lesser direct impact of rising U.S. interest rates.
Sample and methodology
The fieldwork for this study was conducted by NMG Group's strategy consulting practice. The breakdown of the 2017 interview sample by investor segment and geographic region is available in the report.
In Canada, the Global Fixed Income Study is restricted to accredited investors as defined under National Instrument 45-106.
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