Global asset owners will increase their alternative fixed-income allocations in the next three years on an expectation that bonds yields will rise, according to Invesco's survey of fixed-income heads.
Some 60% of sovereign wealth fund officials who were surveyed, 58% of defined contribution plan officials and 41% of defined benefit fund officials said they had plans to increase allocations to alternative fixed-income assets classes in the next three years.
Fixed-income specialists at 49% of the asset owners surveyed said they have raised their allocations to alternative fixed-income assets such as asset-backed securities, bank loans, infrastructure and real estate debt at the expense of sovereign bonds in the past three years. Some 26% of North American asset owners increased investments in these strategies compared to 17% in Europe and 13% in the Asia-Pacific region.
At the same time, 42% of defined contribution plans, 40% of sovereign wealth funds and 29% of pension funds increased their exposure to core fixed income during the same period.
However, in the next three years 47% of defined benefit funds plan to decrease their allocation to core fixed income, while 35% will increase it. Some 83% of defined contribution plans will increase core fixed income compared to 17% that will decrease it. Some 50% of surveyed sovereign wealth funds will increase the allocation to core fixed income, while 30% said it will decrease.
Most respondents believed the global economy has entered a normalization phase, featuring modestly improved economic growth, continued low yields, low inflation and ongoing central bank intervention. Low yields remain the dominant challenge for investors, but issues related to aging populations, regulations and geopolitical risk persist, they said.
Investors across North America, Europe and the Asia-Pacific region said from a risk perspective in the coming year they will focus on inflation protection. While bonds yields are expected to pick up on the short end of the curve, investors did not reach a consensus so as to the yield trajectory on the long end of the curve. Interest rates will increase slowly but gradually in 2018, according to the surveyed investors.
Nick Tolchard, head of Europe, the Middle East and Africa for Invesco's fixed-income business, said in a telephone interview that the respondents plan to reinvest the proceeds from equity returns into core fixed-income instruments.
The heads of fixed income at a total of 79 pension funds, defined contribution plans, sovereign wealth funds, banks and insurance companies were interviewed for the survey.