European institutional investors are more focused on increasing fixed-income returns than an uncertain regulatory environment, according to a new report from Greenwich Associates. Because of low interest rates, institutional investors are using complex fixed-income investments such as credit and interest-rate derivatives to boost returns and lower risk, the report said. In addition, new financial regulations, including mandated changes in pension accounting in the United Kingdom, are creating incentives for institutions to shift assets into fixed income from equities.
"The expected returns on core fixed-income holdings like government and investment-grade bonds fall short of the basic needs of pension funds and other institutional clients," Greenwich Associates consultant Andrew Awad said in the report. "As a result, European institutions are increasingly looking for alternatives with the potential for incremental returns."