Portfolio Institutional: How are fixed income investors navigating this low interest rate environment? Alan Pickering: We were told to expect lower for longer, but it looks like being even lower for even longer.


It is important that trustees decide what they want a fixed income asset to do. Is it to preserve value or generate income? Is it to gen- erate income now or in the future? Trustees must align their fixed income investments with their lia- bilities and have cognisance of the timetable within which they need to meet those liabilities and what the ultimate journey is. Is it to transfer risk to the insurance market?


It is an area where trustees need to be regularly trained because what we learnt last year may not be appropriate this year. People used to say that fixed income was the boring piece of the jigsaw, but it is now one of its more challenging parts. Duncan Willsher: You need to take a scheme specific approach to what you are trying to do, but the trend is that populations are age- ing. It doesn’t matter if you’re going to run the scheme off by your- self, pass it to an insurer or, for defined contribution (DC), have a stable capital base in retirement that has some income coming off it. Irrespective of the individual path you take, they all point towards fixed income and that presents challenges in sourcing assets. Many trustees, when they step away from corporates, struggle to understand what some of these less common assets are. There are challenges. Jim Cielinski: There is a shift in what role fixed income plays for broader portfolios. Their role as a diversifier, which was held for so long,


has now transformed to a blend of income and


diversification. The ability of bonds to go up in value while everything in your risk- ier portfolio goes down is now limited at today’s low rates. Returns are not going to be what they once were. Theory tells you that if you lack a good diversifier, you should be de-risking, but that’s a challenge if your scheme needs a certain return. The role of fixed income is shifting. It still gives diversification but controlling the downside while providing a reasonable income is what clients are demanding. Investors don’t want the lowest yielding assets because it doesn’t work in their model; yet going too far out on a limb increases the correlation of their bond portfolio to equities. And given the cur- rent level of rates, they are probably better off owning more equities. It is a tough balance. Balancing risks and low fixed income yields to meet a client’s risk and return objectives is difficult in today’s rate environment. Julien Halfon: Things are getting more complex as schemes start using instruments in a different way than they used to. The move to illiquid assets to get more return is a clear example of this trend. A massive share of the corporate world offers negative real yields,


8 March 2020 portfolio institutional roundtable: Fixed income


Looking at the numbers, the next crisis will emerge in corporate credit. Jim Cielinski, Janus Henderson Investors


while illiquid credits, such as infrastructure bonds, have a positive spread above inflation and gilts. They are not purely illiquid as they are also cash generating, which is an interesting situation. Infrastructure debt, real estate credit, mid-market loans and SME debt tend to amortise fast and are not that long dated. So, by year four or five, a 10-year loan could get more than half of its money back through coupon payments and capital amortisation. At the same time, private credit is also an instrument that people have started using in the DC world. For years, everyone was saying that DC investments should be liq- uid, but as we saw with Nest last year, DC schemes have started investing in illiquid credit as they want something slightly different. People are getting more sophisticated and understand the com- plexity of what they are doing. They are adding new dimensions (like liquidity) to their traditional overall objective and risk toler- ance approach. Mark Wilgar: Investors are using the full breadth of fixed income assets that are increasingly seen as an alternative asset class, in some regards, to the hedge funds a lot of investors are frustrated with.


Different or esoteric areas of fixed income investing are growing in popularity and there are a range of objectives as to why people allocate to fixed income. It anymore.


isn’t necessarily just defensive


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