Institutional investors are casting an ever wider net as they continue to search for the “income” in fixed income.
Government bonds around the world have continued to disappoint. In 2013, the Barclays U.S. Aggregate Government Total Return index returned -2.6%, and for 2014 through March 27, it returned 1.5% in U.S. dollar terms. The Barclays U.K. Gilt All Maturities index returned -4.2% in 2013 and 2.6% so far this year in U.S. dollar terms. As such, money managers say demand for non-traditional, and more esoteric, credit investments is on the rise.
“Where pension funds are derisking purely by investing in government bonds, we are having conversations around putting long credit into those allocations,” said Prashant Sharma, managing director and head of international fixed income for insurance at J.P. Morgan Asset Management in London. “They are diversifying for yield.” J.P. Morgan Asset management has fixed-income AUM of $827 billion.
Part of that diversification for yield is a move toward more unconstrained types of fixed-income strategies. “Those with benchmark fixed-income allocations are aware that they have had a fantastic run, but yields are still low and they are getting more concerned about losses on capital as the Bank of England and the Federal Reserve talk about the fact that there will be rate hikes and rate normalization in the future,” said Iain Stealey, portfolio manager, executive director, global fixed income at J.P. Morgan Asset Management in London. “In that environment, we all want to preserve capital. Pension funds are looking at unconstrained strategies that can move around fixed income, have lower sensitivity to interest rates and are taking advantage of high yield and credit.”