The survey of institutional investors carried out on behalf of NN Investment Partners found 30% see the market as becoming more attractive over next three to five years versus 39% who say it will be less so. At the same time, 39% expect to see an asset allocation shift to equities from bonds if interest rates rise versus 43% who do not.
The survey suggests fixed income allocations will hold steady, with it also finding only 21% of respondents expect their allocation to fixed income to increase and 25% expect it to decrease.
Considering the current backdrop for bond investments, with yields at record lows and a Fed rate rise on the horizon, one could have expected investors to have a more negative attitude towards bonds. And indeed, the survey findings do not exactly correspond with Expert Investor Europe’s investment sentiment research on the issue, though it depends very much on the type of bonds. It should also be noted that the NN IP survey concentrates on institutional investors, who tend to be more inclined to invest in bonds than their wholesale counterparts.
More than 40% of European fund selectors have consistently been telling us over the past year that they will decrease their exposure to developed market government bonds, and increase their weighting to (European) equities. At the same time, almost no-one plans to increase allocation.
The picture is very different for high yield bonds though, where buyers and sellers match each other, both at about 20%. This breakdown is consistent with the results of NN IP’s survey. Investment grade corporate bonds take the middle ground in the popularity range: less than a third of Europe’s fund buyers plan to decrease allocation, while the majority plan to keep their exposure unchanged.
A rate rise will hurt
“Rising interest rates will of course be painful for bond investors,” said Sylvain de Ruijter, head of global fixed income at NN. “If 10-year bond yields, for example, start to rise, that would lead to negative returns for a lot of bond funds. But looking forward, higher yields would mean better yield income in the future. It would be even worse if, in five years, we are at the same levels as today, because of what that says about the economy and about the effectiveness of policy makers.”
“If rates rise significantly in the next five years, fixed income’s performance may not be spectacular, and equities may indeed outperform, but with greater risk,” De Ruijter added. “And more importantly, nobody knows if such a rate increase is going to happen. If you invest broadly and actively in fixed income, you can earn a decent return.”
Ruijter noted that is clear that rising interest rates following unprecedented quantitative easing means bond markets are ‘entering new territory’ therefore asset managers will need to show greater flexibility and have the capacity to ‘assimilate a plethora of market data’ in order to make active management decisions.