Nick Tolchard, head of Invesco Fixed Income, EMEA, discusses the key trends within this topical asset class
Through conducting 79 face-to-face interviews with leading fixed income specialists the Invesco Global Fixed Income Study aims to provide unique and valuable insights into this ever-changing asset class. These experts, typically heads of fixed income, work across pension funds, sovereign investors, insurers and private banks in North America, Europe, and Asia-Pacific and are responsible for fixed income portfolios within asset owners collectively holding a total $4.4trn (£3.1trn) AUM (as at 30 June 2017).
Fixed income investors are currently navigating a great calm in fixed income markets which has persisted since the turmoil of the financial crisis and its aftermath. Expectations of yields risings, to what are considered as more typical levels, have been continuously postponed.
However, there is a sense among respondents that this prevailing period of calm is coming to an end as central bank intervention is withdrawn and investor behaviours subsequently change. There is no consensus of what comes next, but respondents are planning their fixed income strategies based on their individual views.
The majority view is that this is a period before different, but still relatively benign conditions, with a subdued 'new normalisation' of economic and interest rate conditions, rather than the calm before the storm. However, a minority do see a calm before the storm scenario, predominately an end of cycle economic downturn caused by fragile economies unable to maintain growth without the degree of central bank support seen since the financial crisis - this is a storm of even lower fixed income yields.
The 2018 Global Fixed Income Study baselines the challenge of fixed income investors to continue to make a key return contribution to the overall portfolio. It documents an adaptation to unprecedented conditions which for the most part were expected to have long concluded by now.
This report has been broken down into six key themes:
1) The 'new normalisation' of fixed income
The study notes how fixed income investors have a broadly positive view of the global economic outlook, but are remaining cautious over the pace of recovery and potential for negative shocks.
2) Low yields remain the dominant challenge; but ageing, regulation, and geopolitics are seeping into investor thinking
Since the financial crisis, low yields have been the primary challenge facing investors but as the global economy looks to improve, this study recognises a host of new challenges impacting fixed income portfolios.
3) Managing the migration of ESG to fixed income
As ESG becomes embedded in equities processes, fixed income often follows. This theme highlights how the adoption of ESG in fixed income is expected to rise rapidly, driven in part by pension fund stakeholders.
4) Core fixed income vs alternative credit strategy
In recent years investors have been reducing allocations to core fixed income and increasing allocations to alternative credit in light of the low yield environment. However, this study identifies that going forward there is an expectation for investors to rotate back towards core fixed income in line with rising interest rates and for this to be funded predominantly from equity portfolios.
5) Broad appeal of alternative credit
Alternative credit has become an important part of fixed income portfolios sine the financial crisis. This theme identifies the perceived benefits of this particular sub-asset class.
6) Most investors use a hybrid model of internal and external asset management
With rising pressure on returns, investors are considering internalisation options. Despite this trend external managers remain important, particularly when it comes to complex fixed income strategies.