ATLANTA, May 18, 2020 /PRNewswire/ -- Invesco released findings today from its third annual Global Fixed Income Study, an in-depth report outlining sentiments discerned from interviews with 159 CIOs and fixed income asset owners globally. Highlights from the study reveal: 72% of investors now have an allocation to emerging market debt versus 49% observed in the previous study; 54% of respondents now believe ESG analysis can unlock hidden value within fixed income; the majority (51%) expressed concern around bond market liquidity, uncertain how bond markets would behave during more challenging periods; and almost half (43%) of respondents believed the end of the record-long economic cycle was a year or less away at the time the survey was conducted.
The study surveyed fixed income investors across North America, EMEA and Asia Pacific with a combined AUM totalling USD $20 trillion (as of December 31, 2019). Respondents included defined benefit and defined contribution plans, sovereign wealth funds, insurers, private banks, diversified fund managers, multi-managers, and model builders. Key findings include:
As interest in EMD continued to grow, investors became more selective, shifting to country-specific allocations
The study finds another year of rising interest in emerging markets debt (EMD). A strong run, relatively attractive yields, and diversification led investors to increase allocations to the sector. 72% of investors now have an allocation versus the 49% surveyed in the previous study – a 47% increase. Specialization is also on the rise, especially among investors attracted by returns (rather than diversification), who prefer country-specific allocations (63%). China is of interest to the 42% of investors who now have an allocation, encouraged by the belief that the Chinese economy and political system offers unique diversification benefits and the lowering of barriers to investment: 62% of investors believe access is less challenging than two years ago.
"Investors are no longer thinking of emerging market debt as a monolithic asset class. We're now seeing increased interest in specific markets, like China. We see this a long-term trend. It's notable that Chinese fixed income in particular is one of the best performing asset classes this year, beaten only by US treasuries," said Rob Waldner, Chief Fixed Income Strategist and Head of Macro Research, Invesco. "For North American investors, our survey shows the majority see their EMD allocations as motivated primarily by diversification, with 68% viewing these allocations as core investments, rather than satellite, suggesting that they fulfilled long-term stable objectives."
ESG cements its place in fixed income
Investors continue to move beyond performance concerns relating to ESG, instead recognizing that managing issuer-related ESG risks have the potential to enhance returns. Specifically, issuers who fail to address environmental – the "E" – and governance – the "G" – concerns may face higher borrowing and refinancing costs, with clear implications for the valuation of these securities for investors. 54% of respondents now believe ESG analysis can unlock hidden value within fixed income. 50% of investors that have incorporated ESG within their fixed income portfolios cite return enhancement as a key driver. 46% of investors who have incorporated ESG within fixed income believe that it has been beneficial to their returns, with just 3% seeing a negative impact.
"There has been a shift among investors who saw the value of ESG in equities, but did not see how the approach could be applied to fixed income; they now view ESG as a significant fixed income strategy. Our research shows that about a quarter of fixed income assets are currently ESG-integrated. It's table stakes when advising on overall investment strategies," continued Mr. Waldner. "Amid the current market volatility, we've seen continued interest in the analysis of non-financial risks as part of the due diligence process. This is especially true given the connection between credit impairment, and risks associated with issuers that can be uncovered by a robust ESG process."
New approaches help to address a bond market liquidity paradox
Asset owners were extending allocations to illiquid asset classes late in the cycle. Yet the majority (51%) expressed concern around bond market liquidity, uncertain how bond markets would behave during more challenging periods with the introduction of regulations such as Dodd-Frank and the retrenchment of traditional market makers that followed the global financial crisis. The response in part has increased interest in strategies that can help improve liquidity and reduce market risk such as block trading directly between customers via ETFs (used by 59% of investors), credit portfolio trading (used by 30%) and wider adoption (56%) of fixed maturity strategies.
"Liquidity and regulatory hurdles continue to be a concern in fixed income markets, both amplified by the 'sudden stop' of the US economy brought on by COVID-19," continued Mr. Waldner. "With these concerns in mind, past and present, our research shows a trend among respondents targeting liquidity premiums with fixed maturity strategies to help alleviate some of the strain. We found 56% of investors are using them, including 72% of DC pensions and 66% of insurers."
Greater caution in advance of market turmoil
Fixed income investors were becoming increasingly risk averse prior to the market turmoil unleashed by COVID-19 in Q1 2020. Almost half (43%) believed the end of the record-long economic cycle was a year or less away, with the consensus for a soft landing. 23% identified a bond market bubble with just 29% fearing a major collapse in bond prices. Central bank easing led to low and negative yields, driving some to take on additional risk to bolster returns and meet objectives. The research shows a market that was plagued by fear: fear of losing, but also fear of losing out. Despite some late cycle risk-taking, the confluence of end of cycle concerns and fears of trade wars may have translated into portfolios that were better protected from the current, unprecedented exogenous shock impacting markets today.
"One factor that may have driven this caution was investors' view that spreads were tightening. Given the appearance of COVID-19 and its impact on the markets, respondents who took precautionary actions in expectations of economic deterioration may now be relieved they did," concluded Mr. Waldner. "But caution wasn't universal, causing some investors to navigate the very large swings we're now seeing in what were previously considered high-quality assets like consumer goods, autos, oil and gas, and travel."
Invesco Fixed Income (IFI) is one of the world's leading fixed income managers with offices in all global financial centers, singularly focused on uncovering and delivering value for clients.
To access full findings of the Global Fixed Income Study or to learn more about Invesco Fixed Income, please visit https://www.invesco.com/us/resources/global-fixed-income-study.
Invesco Advisers, Inc., an indirect, wholly owned subsidiary of Invesco Ltd., is a global independent investment management firm dedicated to delivering an investment experience that helps people get more out of life. Our distinctive investment teams deliver a comprehensive range of active, passive and alternative investment capabilities. With offices in 25 countries, Invesco managed $1.1 trillion in assets on behalf of clients worldwide as of March 31, 2020. For more information, visit www.invesco.com.
Sample and Methodology
The fieldwork for this study was conducted by an independent full service advisory firm integrating consulting, insights and analytics exclusively in asset management, wealth management and protection.
Invesco chose to engage a specialist independent firm to ensure high quality objective results. Key components of the methodology include:
- A focus on the key fixed income decision makers within institutional investors and wholesale investors (including private banks, diversified fund managers, multi-managers and model builders), conducting interviews using experienced consultants and offering market insights rather than financial incentives
- In-depth (typically 1-hour) face-to-face interviews using a structured questionnaire to ensure quantitative as well as qualitative analytics were collected
- Analysis capturing investment preferences as well as actual investment allocations with a bias toward actual allocations over stated preferences
- Results interpreted by NMG's strategy team with relevant consulting experience in the global asset management sector
In 2019, we conducted interviews with 159 different insurers, defined benefit and contribution pension funds, sovereign investors and private banks across Asia Pacific, EMEA and North America. The breakdown of the 2019 interview sample by investor segment and geographic region is displayed in
Survey participants' experience may not be representative of others, nor does it guarantee the future performance or success of any product. The opinions expressed are those of NMG and are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
There may be material differences in the investment goals, liquidity needs, and investment horizons of individual and institutional investors. Invesco is not affiliated with NMG, an independent full-service market research provider, specializing in wealth management and financial services market research and consulting.
Media Relations Contact: Matthew Chisum 212.652.4368
SOURCE Invesco Ltd.