Editorial


FIXED INCOME: MOVING UP THE RISK CURVE


CONTENTS


P4 – 5: Fixed income Welcome to our debate on how institutional investors are using fixed income in their portfolios.


P6: Fixed income in figures


Fixed income has changed. The days when adding debt to your portfolio meant gilts, investment-grade corporate bonds or, if you wanted a little more excitement, junk are gone.


The low rate environment that resulted from the financial crisis has forced institutional investors to take more risk to generate the cash needed to pay their members’ pensions. And it seems that they need reg- ular income streams now more than ever before. Cash-flow negativity is sweeping through the UK’s institutional invest- ment market. Indeed, three out of four defined benefit schemes pay-out more to members than their investment portfolios generate. It is a prob- lem that is expected to get worse.


In response, schemes are ditching equities – 20% in 2019, down from 50% in 2010 – to focus on cash-generating assets, such as property and debt. Yet with interest rates hovering around historic lows, gilts and high- grade paper rarely return enough to pay the bills anymore. The size of the problem can be summed up by corporate bonds. More than a fifth of such debt globally had a negative yield at the end of last year, while more than half (51%) of investment-grade debt issued in 2019 was placed at the lower end of the risk spectrum (BBB). But a lack of yield has not meant a lack of opportunity. Institutional inves- tors are looking more to asset classes that were once labelled alternative, such as lending money directly to smaller companies or loans secured against property or infrastructure assets. With the risk and liquidity profile of assets that schemes are adding to their debt portfolios changing, as are the size of their exposures – 54% in 2019, up from 41% in 2010 – we brought a group of asset owners and fund managers at various ends of the risk spectrum together to discuss how institutional investors are using fixed income in 2020.


Mark Dunne Editor


m.dunne@portfolio-institutional.co.uk


A snapshot of how the low yield challenge is influencing investment portfolios.


P7: The participants An introduction to the people contributing to our debate.


P8 – 17: Fixed income: The discussion Asset owners, fund managers and consult- ants talk about fixed income in a low interest rate world.


P18 – 19: Private credit BNP Paribas AM’s Julien Halfon explains the benefits of taking a personalised approach to liability matching.


P20 – 21: Cash is king Norbert Fullerton of Janus Henderson Inves- tors discusses why a focus on income is crucial for defined benefit schemes going forward.


P22-25: Bond ETFs


Investors hungry for income but unwilling to give up liquidity could opt for a bond ETF. But, as Mona Dohle reports, this may not solve any liquidity issues.


March 2020 portfolio institutional roundtable: Fixed income


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