Clearly change is in the air for fixed income, not only in how it is transacted but in what it is invested in and its central purpose.
What do the three key findings from our survey mean for investors and what steps should they take to keep their portfolios effective?
Key Finding 1: ESG Tops the Agenda
Our survey shows that ESG has primacy even over recent market events and concerns, such as inflation and central bank decision-making. Given its importance and increasing growth trajectory, we believe that all fixed income investors should have in place an investment plan that reflects their longer-term ESG values, targets, and objectives.
Climate is, for the foreseeable future, the single-most important topic within ESG, making it critical that investors determine how they will reflect climate-related aims, whether in their allocation or selection and inclusion decisions.
The mass movement toward Paris alignment reflects a starting point for investors to start their ESG integration discussions. As more investors establish a climate framework to guide investment policy, we would expect to see further consolidation here.
Key Finding 2: Indexing Cements Its Place
Active remains the go-to approach for much of fixed income, but our survey shows a clear movement toward increasing use of indexed approaches. We maintain that there is room for both approaches and that the decision should be made on the clear merits of each according to circumstances.
Investors should assess the resources involved in the selection and ongoing oversight of active management, and how those managers pair with others in their selection as well as with available indexed options. The question should be asked as to whether there is truly a longer-term advantage to using active exclusively. We see a number of large concerns and multi-asset teams using indexed both exclusively and in tandem with judicious use of active.
Using indexing where oversight or fee resources are scarce can help fund (either with money or time) the highest-conviction active ideas. Where return is the key driver to sector allocations such as with emerging market debt or high yield, indexing is an even more important way to harness this return potential efficiently.
Key Finding 3: New Sources, New Approaches
Investors are increasingly seeking allocations to help tackle inflation and they’re expanding their search for return opportunities beyond the traditional. In short, more investors than ever are exploring alternatives to a greater degree.
The search for differentiated sources of return has several impacts on fixed income portfolios. For example, lack of liquidity and transparency in private assets can restrict insight and hamper allocations. We believe it can make sense to pair private assets with liquid publicly traded exposures such as high yield to help with managing allocations and flow.
In terms of new approaches, we observe that larger investors are driving demand for data-driven, systematic fixed income strategies that combine low-cost, broad asset class-pure exposure, with diversifying (from most fundamental) factor-based alpha drivers.
Of note is how systematic, in the minds of many of our survey respondents, is considered a replacement for active, perhaps signaling a forthcoming shake-up in some of the most fundamental fixed income assumptions.