LONDON — In Europe, fixed income is beginning to look a lot more like equities in the eyes of institutional beholders.
European institutional investors, led by U.K. pension funds, are demanding fixed-income strategies that are inching closer to their higher-alpha counterparts in equities, said Bill Muysken, London-based global head of research for Mercer Investment Consulting.
These mandates allow fund managers more freedom to use higher-risk instruments such as high-yield bonds, credit default swaps and leveraged loans on a global scale. Long-short, net shorting and other applications more typically applied to equities are employed.
"There's been quite a sea change among U.K. pension funds' willingness to take on more active risk (in fixed income)," said Andrew Wilson, managing director and co-head of global fixed income and currency at Goldman Sachs Asset Management, London.
GSAM managed $161 billion in fixed income globally as of June 30, up nearly 45% from two years earlier, with European clients as a key force. European clients are allocating 20% to 30% of their fixed-income portfolios to higher-alpha strategies with return targets of about 150 to 200 basis points above a client-specified benchmark, net of fees.
"We expect this to be a global trend," said Mr. Wilson, referring to higher-alpha global fixed-income strategies. "As the pressure to generate higher levels of returns increases, investors have to look at new ways of taking risks and this will have to be considered."
Other U.S.-based fixed-income managers have also witnessed a surge in fixed-income assets under management. While statistics are not broken down by higher-alpha fixed-income strategies, most concur this is a main driver for growth in Europe.
Pacific Investment Management Co., Newport Beach, Calif., had £68.9 billion ($131.2 billion) in fixed-income assets under management in Europe as of Sept. 30, compared with £66.5 billion at year-end 2005. This does not include some of its most recent hirings, including a £96 million unconstrained, higher-alpha global bonds portfolio from the £1.3 billion Kingfisher PLC Pension Scheme, London.
Western Asset Management Co., Pasadena, Calif., reported fixed-income assets under management totaling $11.9 billion as Sept. 30, up 60% from six months earlier, according to spokeswoman Mary Athridge. This compares with $7.4 billion as of Dec. 31, 2005. One of its latest new clients is the £2.5 billion Hampshire County Council Pension Fund, Winchester, England, which hired the manager in October to run a £125 million higher-alpha global bonds strategy.