Appetite for high yield bonds is at its strongest for almost three years: some 40% of the fund selectors our researcher met on his trip to Madrid earlier this spring will up their exposure while only 10% are going to sell. The comeback of high yield is all the remarkable considering appetite was at an all-time low during the whole of 2014, with just 6% buyers in Spain in September.
While they are increasing their exposure to high yield, lower-risk government bonds are being sold off. More than half of the Spanish capital’s fund buyers either have completely ditched their allocation to government bonds, or will reduce their holdings. Investment grade corporate bonds, on the other hand, are surprisingly popular: most will keep their allocation unchanged, while some will even increase their holdings.
Stretching it out
The Spanish hunt for yield is also reflected in fund buyers’ duration management. Compared to a little more than two years ago, they allocate a much higher proportion of their bond investments to long-duration bonds which typically have a higher yield than short-duration fixed income. Investments in short-duration bonds outnumbered those in long-duration bonds by almost four to one in December 2012. Now this ratio has shrunk to 1.5 to one.
Absolute return: fitting in with the trend
Together with European equities, absolute return is the most popular asset class with Madrid’s fund selectors. There is a difference though: while they can only step up their equity
allocation moderately, there are no such constraints for absolute return as those strategies are generally not considered riskier than bond funds. Quite on the contrary: absolute return funds are designed to be safeguards for wary investors. So little wonder the risk-averse Spaniards want to buy in. Demand for absolute return has been consistently strong in Spain for quite some years, both in Barcelona and Madrid.
Six in 10 fund selectors in the Spanish capital want to increase their exposure, but quite a few of the interviewees told our researcher that they struggle to find the right product for a reasonable price. Of all different absolute return strategies, global macro (70% buyers) and long/short equity (50%) stand out.