can say as a bond investor that “for me to lend you money you must provide the following criteria or improve your reporting on them”. If they cannot produce that reporting, we may not lend them the money or perhaps charge more for it. In some respects, bond investors can arguably have more influ- ence than equity owners on these aspects. For pension schemes, which have a lot of their money held in con- tractual fixed income assets, engagement will become more important. However, transparency will have to improve greatly.


PI: What do you expect to see in the fixed income markets in the coming year? Cielinski: Rates could rise further, but from these levels they will be contained. That said, I would focus on growth assets, credit risk, mortgage risk, increasingly look at things secured by real assets which should benefit from the recovery. You are still not paid enough for taking a lot of interest rate risk. So, I would favour shorter maturity bonds. Much of the rate rise we expected is prob- ably behind us now. Bond yields are now at fair value, if not a little bit above. They have priced in higher inflation, so a lot of the pain we have seen in the past few months will not persist. Pickering: Fixed income will be an interesting place for young investment managers to work. In the past it was regarded as a bor-


ing, poor relation of the equity market. Now there are so many ways we want to tap the fixed income markets that there is oppor- tunity for creativity to make it a win-win for borrower and lender. Hitchman: There are some interesting opportunities, but with the fiscal medicines that have been provided in the past 12 months, when things start reverting to the new normal, whatever that looks like, default risk will potentially rise. Whilst there are attractive opportunities, having a good credit manager to mitigate those risks will be key to generating returns from current pricing, which we believe has been inflated by QE. There is a real risk of inflation increasing and the impact that could have over the medium term. MacRae: Whilst taking opportunities to capture attractive pricing will improve overall returns, ultimately the overall strategy trumps most things. Systematically securing the income we need over time, and measuring liabilities based on this income yield, trans- forms funding discussions with the sponsor. Taking advantage of pricing opportunities that arise to capture the quality of income we need, either relative to cash or growth assets values, improves the funding position. But ultimately, you need to have a clear funding and investment strategy to drive funding out- comes. Bond pricing is not a secondary issue by any means, but it may not be the first consideration for the pension scheme investor.


We are in a different environment from 10 or 20 years ago in that the


‘easy money’ has gone. Peter Martin, Medical Defence Union


May 2021 portfolio institutional roundtable: Fixed income


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