We asked a group of European investors with total assets of €84.4bn about their appetite for alternative credit. The answers confirm that the sector is set to grow further.

Over two-thirds of the 16 pension funds questioned for this month’s focus group say alternative credit has become more important in their fund’s portfolio over the past five years.

Three funds plan to broaden their alternative credit portfolio, adding new asset classes over the next two years. Two intend to decrease their existing exposure.

Half of the funds are confident of the ability of the asset management industry to provide suitable products in asset-backed securities and infrastructure debt. A third of participants have a lack of confidence regarding project finance. A Dutch fund says it is “always looking for new possibilities”.

Respondents are most confident in the ability of pension consultants to assess asset managers’ competence in high yield corporate bonds and multi-asset fixed income or credit strategies.

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The CIO of a UK fund comments: “Consultants tend to view credit from a bond/asset manager perspective rather than a banking/credit perspective, which means they do not quite understand the nuances of lending/securitisation in quite the right way.”

Just two funds say the trends of the past 12 months in pension fund and/or insurance company regulation, at both local and European level, have moved in the right direction to help funds allocate risk to a broader range of credit assets. 

Over a quarter of those polled say alternative fixed income investments are becoming a staple for pension funds owing to the ongoing quantitative easing (QE) programme from the European Central Bank.

Two say that although QE makes investment in core fixed income more attractive, investors like them will keep on focusing on selected opportunities in those markets. Three say that investments outside of ‘core’ fixed income remain suitable only for more sophisticated investors.

Most respondents are worried about the levels of overall debt in much of the world.

“Leverage has not gone down sufficiently,” says a UK fund. “Indeed credit terms are beginning to loosen to pre-crisis levels. QE has exacerbated the issue causing artificially asset price growth.”

Six funds are considering infrastructure debt for their portfolio; five, private debt/direct lending; and four each, inflation-linked government debt, high yield corporate bonds, and insurance-linked securities.

focus group