NETHERLANDS - Dutch pension funds have radically changed their attitude towards some of the riskier fixed income categories over the past year, a survey by our sister publication IPNederland shows.

A year ago, 57% of respondents to the annual survey reported tactical allocations to high-yield bonds, while just 14% made strategic allocations to high-yield. A year later, 39% of respondents include high-yield in their strategic asset mix, while only 16.7% make tactical use of the category.

Likewise, emerging market debt (EMD) has become more strategically important, with 38.9% of respondents including it in their strategic asset mix, up from over 21% a year ago.

Although this would indicate these fixed income categories moving into the mainstream, at the same time the survey shows a greater risk aversion among pension funds, as a growing number of Dutch schemes shy away from these categories altogether. 

A year ago, 21% of respondents did not invest in emerging market debt at all. This year, however, one-third do not invest in EMD.

High-yield in particular has lost its lustre. Nearly 40% of respondents do not invest in high-yield bonds, up from just 14% a year ago. As many as 44.4% of respondents do not intend to invest in high yield in the next six months.

Credits are considered the most interesting fixed income category for the next six months, followed by emerging market debt. Some 44% intend to increase their allocation to EMD over the next six months.

Over 44% intend to decrease the allocation to sovereign bonds, up from 14% a year ago.

Further, 66.7% of respondents report that the euro debt crisis is affecting their fixed income portfolios. Some schemes have not been prepared for the continuing decline of long-term interest rates, while others refer to rising risks and volatility as well as the fact that risk diversification has become more difficult.

In response, several schemes indicated they intend to decrease their allocation to sovereign bonds, limit sovereigns to AAA-rated countries only, and carefully monitor risks even within these portfolios.

Despite the recent unexpected rise in inflation - and despite the fact that the upcoming pension reforms will shift focus from nominal to real pension benefits - inflation is not much of an issue, with two-thirds of respondents not investing in inflation-linked bonds, up from 43% a year ago.

This year's annual IPNederland fixed income survey covered 18 Dutch pension funds, with assets under management ranging from €78m to €14.2bn and total assets of slightly under €39bn.