The looming reality that interest rates must eventually rise — depressing bond prices — is pushing more U.K. pension funds to take a look at their fixed-income portfolios from an absolute-return stance.
“Interest rates are so low; they can't go down much further,” said Dominic Pegler, managing director in BlackRock Inc.'s fixed-income group based in London. “That being the case, why would you want to hold bonds with a high degree of sensitivity to any increase in interest rates? Immediately, absolute-return bond strategies would come to mind.”
Designed to perform whether interest rates are rising or falling, absolute-return bond strategies are attracting investors such as pension funds, endowments and insurance companies. For pension plans, many of which are underfunded, the need to achieve higher returns from bonds has become more urgent, sources said. Diversification is another main draw.
“The U.K. is leading the way,” said Mr. Pegler. BlackRock officials declined to provide total absolute-return assets under management, but said recent institutional mandates in the strategy have ranged from £50 million to £300 million.
Daniel Phillipson, senior vice president and product manager for alternatives for Pacific Investment Management Co. based in Munich, added, “We're talking to clients, particularly in the U.K., almost on a daily basis about these types of strategies.” PIMCO's assets under management in absolute-return bonds increased about 55% to $17.9 billion globally in the year ended Dec. 31.
Consultants and managers see less interest from continental Europe and the U.S. However, they expect more institutions worldwide to consider absolute-return bond strategies as returns in traditional active bond portfolios wane. In March, for example, PIMCO Managing Director William H. Gross said in a radio interview that “bonds have seen their best days” as real interest rates have been edging higher.