Some research from Capital Group, which looked at institutional investors attitudes to fixed income, recently caught our eye.
A third of those consulted by Capital Group manage assets in excess of £50bn and they said they were optimistic on the case for fixed income for diversification reasons rather than as an income holding, despite the higher yields on offer.
They feel the inverse correlation between bonds and equities has been restored as yields have risen with Ed Harrold, a fixed income specialist at Capital Group, saying the view among the allocators they consulted was that the income was “an additional benefit” right now, rather than a core reason to own the asset class.
He added that with diversification, rather than yield, in mind the allocators in question are sticking to the “quality” end of the bond market, and see little reason to take extra credit risk.
Harrold said the higher yields on offer now, even from government bonds and investment grade credit, “offer a bit of certainty” as the yields should mean, even if the prices fall a bit, one can still be in profit.
The one area where he does see an increase in appetite among allocators is for local currency emerging market debt, as the relative weakness of the dollar increases the attractiveness of the asset class, while those with yield as a focus have found attractive income there.
Among the allocators we cover, the average exposure to emerging market debt funds hasn’t really moved over the past 18 months or so, at 1.81 per cent, while the average exposure to investment grade bond funds has risen from 7 per cent to 8 per cent.
