While the majority of global fixed-income specialists see the global economy on the road to recovery, many have a significant appetite for alternative credit, such as real estate debt and bank loans, according to a new survey by Invesco Ltd.
The inaugural survey interviewed 79 global fixed-income specialists, including heads of fixed income as well as chief investment officers and heads of investment strategy. It found 58 per cent of respondents believe the economy won’t go through a typical normalization process. Instead, they anticipate a period characterized by continued low yields, low inflation and central bank support.
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The survey also found investors have a significant appetite for alternative credit, such as real estate debt and bank loans, as respondents allocate 19 per cent of their fixed-income portfolios to alternative credit strategies, with the largest appetite in North America at 26 per cent.
“The range of sub-asset classes within fixed income has grown significantly over recent decades and now spans a broad range of diverse investments to include bank loans and real estate,” said Rob Waldner, chief macro strategist at Invesco, in a news release. “While traditional core fixed-income assets continue to play a foundational role in many fixed-income portfolios, alternative credit is expected to increase in institutional fixed-income investors’ portfolios.”
Indeed, while investors have been reducing allocations to core fixed-income portfolios over the past three years, nearly two-thirds (63 per cents) of respondents expect to rotate back them over the next three years.
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One area within alternative credit that holds particular appeal for fixed income investors is emerging market debt, according to the survey. While respondents currently allocate three per cent in this space, 29 per cent expect to increase their allocation in the next three years. Investors believe emerging market debt offers opportunities because of improving economic fundamentals, smaller current-account deficits and less impact from rising interest rates in the United States.
The survey also found that 35 per cent of respondents incorporate environmental, social and governance factors into their fixed-income portfolios, and there’s significant peer pressure to fall in line with the trend of including those issues in investment strategies.
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