UK - Invesco has added its contribution to the fixed income debate, forecasting a 50% rise in bond exposure over the next five years, with a particular pull from corporate offerings.
According to Invesco, a whole host of factors - including two years of negative equity market returns, new accounting standard FRS17 and diminishing inflationary fears - are likely to result in a substantial increase in the proportion of UK final salary schemes eyeing security in bonds.
The fund manager estimates that the average pension fund’s fixed income exposure could rise by as much as 50% over the next five years – representing a shift in assets of up to £200bn. And as investors expand their fixed income holdings they are likely to increase holdings in corporate bonds.
Mark Dowding, head of global bonds at Invesco Asset Management, argued that the emphasis in the coming decade will be on portfolio diversification and maximised risk-adjusted returns, leading investors back to fixed income.
“Though yields have fallen to low levels by historic standards, long dated government bonds are still attractive when considering the very low level of inflation today,” he said.
“The case for non-government bonds is even more compelling with the additional yield offered by corporate bonds being close to record high levels following credit concerns raised by the slowing of the economy and the collapse of US energy giant Enron. We believe these fears will prove exaggerated and spreads should decline as the economy improves and fears over accountancy standards recede.”
Dowding added that government bonds tend to be more sensitive than corporate counterparts to movements in the economic cycle and to short term interest rates.
“High quality corporate bonds are attractive when considering volatility-adjusted returns and we believe this is the point in the cycle when corporate bonds are likely to outperform: 2002 could be an especially good year for investors in this asset class.” Amvescap-owned Invesco has assets under management of £23.3bn, of which £7.2bn are institutional fixed income assets in the UK.
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