Feature


Exchange-traded funds (ETFs) and pension schemes are strange bedfellows. As institutional investors, pension funds are in the fortunate position of being able to commit to large scale, relatively illiquid investments to achieve higher returns. Yet with the expo- nential growth of the ETF market during the past decade, institu- tional investor demand has increased strongly. The drivers of institutional investors’ appetite for passives have been widely covered, they offer an alternative to poorly performing active funds and lower costs. Yet the main reason why pension schemes choose to go passive appears to be liquidity. Some 80% of institutional investors hold ETFs due to how quickly they can be turned into cash, according to a survey by Greenwich Associates. Almost half of all respondents also indicated that they are using


bond ETFs as a cash proxy, but can such vehicles offer additional liquidity when volatility spikes?


Bond market drought Times are undoubtedly challenging for bond market investors. After more than a decade of loose monetary policy, a quarter of the world’s bonds, amounting to more than $14trn (£11.48trn), are trading at negative rates. During the summer, the yield on 10-year US treasuries fell below that of two-year bonds as investors search- ing for safety piled into long-term high-grade debt. Yet for many defined benefit (DB) pension schemes, holding illiq- uid assets alone is not an option. The majority of final salary schemes in the UK are closed to further accrual and as the share of


March 2020 portfolio institutional roundtable: Fixed income 23


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