Seventeen (71%) of the investors polled for this month’s Focus Group say that credit has become more important in their portfolio over the past five years. This is an eight percentage point increase on last year’s survey. Five respondents say credit has become slightly less important over the past five years, compared with just one in 2015.
Ten respondents say the trends of the past 12 months in pension fund and insurance regulation are moving in the wrong direction to help their fund allocate risk to a broader range of credit assets. A Dutch fund considers regulations to be “solving a problem that does not exist. Regulation itself is a good thing, but now it is overshooting”.
Another Dutch fund says: “Regulation is totally missing the mark. In my opinion, the risk(s) actually increase due to (new) regulation.” Two respondents say regulation is moving in the right direction and 11 state that the trends are mixed.
A third of funds are going to leave their core fixed-income portfolio unchanged over the next two quarters; five funds plan to shift their allocation from core sovereign bonds to corporate credit; four intend to shift their allocation from core sovereign bonds and corporate credit holdings and move into other areas of the credit markets; and one is going to divest its core sovereign bond holdings.
Respondents have most confidence in the asset management industry’s ability to provide suitable products for funds in multi-asset fixed-income or credit strategies, and absolute return or long/short credit strategies. In 2015, syndicated loans were the most positively viewed, but this year only half the number of respondents (five funds) have confidence in them.
A Germany fund says: “Syndicated loans, private debt and distressed debt are by definition illiquid markets, so it is complicated to set up funds with the necessary requirements regarding size and tradability to be investable for pension funds.”
Respondents are not overly confident in the ability of pension consultants to assess the competence of asset managers in credit strategies. “Some of these activities are quite specialist and require a different understanding than the usual corporate bond analysis background possessed by most consultants,” comments a UK fund.
Over half of those polled (54%, compared with 65% in 2015) say most institutions can get involved in asset classes such as loans, asset-backed securities (ABS) and direct lending on some level, and that they are not only for the biggest European funds. “ABS is woefully misunderstood as an asset class,” says the CIO of a UK fund.
Seventeen respondents say the negative yields on many long-term government bonds are sustainable for between one and three years. “The policies of central banks have pushed bond markets further into negative yield territory in recent months. There is no sign of these policies reversing, if anything,” says a UK fund.
With regard to the European Central Bank’s quantitative easing (QE) programme, 10 funds agree that lower core rates for longer will gradually push them towards the edges of the fixed-income market. Eight state that ‘alternative’ fixed-income investments will become a staple for pension funds; three will keep focusing on selected opportunities in fixed-income markets; and three state that investments outside of core fixed-income remain suitable only for the more sophisticated investors.
Nine respondents state that since the beginning of QE, it has been more difficult to trade fixed-income assets, but the impact on their performance has not been significant. A Dutch fund comments: “Generally investors are trading (a lot) less. Also our ‘buy and maintain’ strategy is not very dependent on trading. Nevertheless, costs have gone up and it takes more time to shift positions.”
Twenty-two funds have investment-grade corporate bonds in their portfolio; 16, high-yield corporate bonds; 13, emerging market debt; 10, asset-backed securities; 10, private debt/direct lending; and eight, distressed debt.