Fixed income – Cover story


income, though holdings of index-linked gilts will remain attractive,” Hedges says.


It is in this inflationary impact that Shaw has a warning for fixed income’s outlook. “I see more people beginning to realise the implications of the enormous government borrowings and stimulus packages on inflation and therefore in their asset portfolio and taking action. “Fixed income, therefore, in my opinion, has further adjust- ment coming over the next year,” Shaw adds. Such a scenario presents a potentially complicated and challenging picture for institutional investors. In March, the Bank of England kept interest rates at a record low of 0.1% and decided not to increase the pace at which it buys government bonds, while showing little concern for infla- tion. At the same time, the European Central Bank increased its bond-buying program from €500bn (£430bn) to a whop- ping €1.85trn (£1.59trn), which could see some active managers increase their bond exposure.


Although at some points on the yield curve there is a funda- mental problem, with yields below -0.7% out to seven years, according Legal & General Investment Management (LGIM). “That means eurozone investors who hold the bonds to matu- rity can expect a materially lower return than if they just held cash at current deposit rate levels,” says John Roe, LGIM’s head of multi-asset funds.


Different landscape


“There is certainly no free lunch anymore,” is how Anand Kwatra, life and investment actuary at insurer Phoenix, assesses the situation. “The future investment landscape will be very different from the past. Investors will need to learn to navigate an era of low returns and elevated volatility.” Chetan Ghosh, chief investment officer of the Centrica Pen- sion Schemes, says that in the current environment bond investing should be seen as a long-term strategy. “Low prevail- ing bond yields mathematically cap the prospective short to


Issue 102 | April 2021 | portfolio institutional | 19


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