On the go: Eighty per cent of institutional investors intend to increase their fixed income exposure over the next three years, with one in six expecting this increase to be “significant”, according to a study by Aviva Investors.
The study, which polled 100 institutional investors around Europe, 20 of which were based in the UK, found that only 9 per cent of those polled expected their fixed income exposure to decrease over that period.
Income generation (36 per cent) and cash flow matching (31 per cent) were the most commonly cited motives for this change, as large institutional investors deal with the volatility unleashed by the Covid-19 pandemic, and look for ways to deal with the maturing defined benefit universe.
Fifteen per cent said they would increase their fixed income exposure as part of a search for diversification, while 11 per cent cited capital preservation.
Fixed income products that place a strong emphasis on environmental, social and governance factors were in high demand. More than four out of five (81 per cent) of investors polled reported increased demand from stakeholders in this area, and 27 per cent of these said this increase was “significant”.
Treasury inflation-protected securities proved particularly popular, with 57 per cent favouring them, while 50 per cent favoured emerging market debt, 48 per cent high yield and 34 per cent investment-grade credit.
There were widespread fears, however, that the vast amounts of debt issued in 2020 may have created a host of ‘zombie companies’ in the market.
More than nine in 10 (91 per cent) said they were worried about the prevalence of zombie companies, while 37 per cent said they expected default rates to rise in the coming months.
Rachel Harris, credit investment director at Aviva Investors, said: “Investors’ increased awareness of their ability to incorporate ESG considerations into the credit and fixed income portion of their portfolios is having a profound effect on the institutional market, as pension schemes and other institutions have come to understand the positive impact they can lock in across both the full breadth of their portfolio and the entirety of their flight path.
“As a result, we are seeing ESG values being reflected more in both return-seeking strategies, but also the latter phases of a scheme’s life where cash flow certainty is critical.”
On concerns about debt and zombie companies, Harris added: “A significant amount of debt was issued by companies in 2020 that has only served to increase the importance of credit and fixed income investors and the influence they can exert on corporates — especially when done in conjunction with their equities counterparts.”
