Fixed income – Cover story
RE-THINKING FIXED INCOME
up nicely. Fixed income is more compelling. It provides that ballast in a portfolio. It will be a better performer for portfolios over the longer term,” he says. Daniel Loughney, senior portfolio manager for fixed income at Border to Coast Pensions Partnership, says the yield sce- nario is indeed a big appeal. “Government bond yields are elevated relative to the past decade. With inflation likely hav- ing peaked and market participants looking to have fully priced central bank monetary tightening, we do see value in government debt,” he adds.
Loughney cites UK index-linked debt now offering positive real yields. “With breakeven inflation rates down to more sensible levels, any further easing of volatility will provide an attractive opportunity to gain exposure to this asset class,” he says. Indeed, this is already a big reversal on the aforementioned bad 2022 for fixed income. “The good news is that if you are now looking to invest new money into fixed income, you can now do so at cheaper prices and a higher yield,” says Olivia Buah, sen- ior investment consultant at Lane Clark & Peacock (LCP). “Investment-grade and high-yield global corporate bonds are offering some of the highest yields in the past decade,” she adds.
Beyond bonds
This potentially presents a deeper case for not just re-think- ing bonds, but re-examining allocations to other fixed income assets. Nest is one institutional investor looking beyond bonds as other parts of the fixed income universe have also become more attractive. “We are looking closely at infrastructure loans and private credit,” Fernando says. “But as always with riskier investments, we need to be selective in our choices. Our priority is long-term investment growth for our more than 11 million members.”
Other parts of the fixed income landscape also appeal to Loughney at Border to Coast. “Credit spreads are also elevated relative to recent history,” he says. “Certain areas of the US credit spectrum offer strong risk-reward, such as securitised credit given their low duration and relationship to short-dated yields which have been pulled higher by the Fed.” He is also looking towards the developing world. “Emerging market sovereign dollar-denominated debt looks particularly attractive,” he says. “We believe that US yields could be close to having peaked which should serve to weaken the US dollar.
Issue 120 | February 2023 | portfolio institutional | 19
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