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Institutionals to increase fixed income allocation despite low returns – survey

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  • Institutionals to increase fixed income allocation despite low returns – survey

EUROPE - European institutional investors are increasingly worrying about achieving returns on their fixed income investments, yet the majority still seeks to maintain or increase allocations to the asset class before year-end, a new survey has found.

According to a survey conducted by JP Morgan Asset Management (JPMAM), the low-rate environment represents the main source of concern, with 22% of institutional investors saying this could pose a serious threat to their fixed income returns.

In addition, 19% of respondents said sovereign or political risk was a concern, while another 19% said they were worried about managing portfolio risk.

Nick Gartside, international chief investment officer for fixed income at JPMAM, said: "The concerns raised by investors indicate they are facing a unique confluence of factors that present challenges across all parts of the yield curve and appear to leave few 'safe haven' fixed income assets to move to."

The majority of investors expect annualised returns of 0-4% per annum over three years.

In spite of these concerns, 73% of the European institutional investors surveyed are still planning to maintain or increase their allocation to fixed income before the end of this year.

Gartside said: "Faced with high market uncertainty, but also stringent liability and regulatory obligations, many institutions may decide the best course of action is to sit tight.

"But it is also important to acknowledge the euro-zone crisis has also created new opportunities for fixed income investors."

According to Gartside, there is now much greater differentiation between the credit risks posed by different sovereign issuers in the euro-zone compared with five years ago.

In total, one-fifth of institutions surveyed said they managed their European government bond allocations passively.

In this low-return environment, institutions want to use low-cost passive management, particularly for straightforward duration-matching purposes where long-term bonds may be primarily held on a 'buy and hold' basis, according to the report.

However, Gartside pointed out that passive investing is less appropriate for fixed income, as the "inherent bias" of increasing allocations to an issuer whose indebtedness is increasing is "a concern".

He added: "This strategy can therefore have unintended consequences, such as high allocations to peripheral euro-zone debt."

JPMAM expects active, fundamental and total return management of high-grade corporate bonds, global high yield and emerging market debt to become more important in the coming months, as European institutions seek ways to diversify their risks.

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