UK - Local authorities do not look to their bond portfolio to generate returns or alpha, but simply for diversification, according to Fidelity International.
In its third annual local authority fixed income survey, Fidelity also found the challenging UK bond market had led local authorities to seek out managers with clear investment processes that demonstrate a methodical way of reacting to performance dropping below the benchmark.
The results showed 90% of local authorities included fixed income in their portfolios. Of these, 48% allocated up to 20% to the asset class while a further 45% invested between 20% and 30%.
Although there was a consistent demand from respondents to hold sterling denominated gilts and corporate bonds, Fidelity observed a marked increased in the discretion given to managers to move into high yield bonds and emerging market bonds.
Active management of fixed income portfolios also rose in the past year, from 62% to 73%. This showed more schemes began to recognise the benefits of actively managing credit risk.
Mark Miller, head of business development, UK defined benefits, Fidelity International said: It is clear that the majority of local authorities want few surprises from their bond portfolio, with the belief that a high allocation to equities is the area to spend the risk budget.
What is also clear is that bond-based liability driven investment strategies are not as attractive to local authorities as some managers think.
By Angele Spiteri Paris
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