Ageing populations, regulation and geopolitics have joined low and falling yields as challenges for fixed income investors, according to a new study.

Invesco’s Global Fixed Income Study 2018 was based on interviews with fixed income specialists within asset owners holding a total $4.4trn (€3.6trn) as at 30 June 2017.

The survey also found that underfunded defined benefit (DB) funds were turning to riskier assets within fixed income portfolios, while managers expecting more geopolitical and other “left-tail” events to occur were looking to increase core fixed income allocations.

Three-quarters of respondents said ageing scheme member populations would affect their fixed income allocations within the next three years, with DB funds facing the greatest fallout. As a result, investors have become more adventurous in selecting cashflow-matching securities.

“We’re certainly seeing a shift into different asset classes, such as alternative credit and also investment grade corporate bonds,” said Nick Tolchard, head of Invesco fixed income for Europe, the Middle East and Africa. “Within fixed income, there is also a movement into longer-dated debt – while most respondents thought there will only be a slow rise in interest rates, they are prepared to take on that uncertainty because of yield compression.”

Tolchard added: “With most investors expecting yields to rise, many expect to respond by increasing allocations to core fixed income.”

Most investors said they took a hybrid approach to implementation, splitting between external and internal management. Only 12% used just an in-house team.

Tolchard told IPE: “It’s common for investors to manage part of their core fixed income allocations internally, but not alternative credit – this is more complicated, so they tend to use global managers specialising in the area.”

He said that while 67% of the whole sample used investment consultants, only 42% of larger investors did so. Consultants were used predominantly for portfolio monitoring, although smaller investors were also likely to use them for manager selection.

The survey also revealed a growing tendency to extend environmental, social and governance (ESG) principles from equities to fixed income investments, driven in part by pension fund stakeholders.

Tolchard said: “Clients are saying they’d like to include ESG strategy in their manager’s agreements, but at the level of relationships, rather more than just products or asset classes.”

The 79 interviewees were typically heads of fixed income, but also included CIOs and heads of investment strategy working across pension funds, sovereign investors, insurers and private banks in Europe, North America and Asia.

Subscribers to IPE Reference Hub can access the paper here.