The survey of 106 institutional investors with total assets under management of €535bn showed that fixed-income products account for an average 77% of respondents’ assets. Of these, only 3% are invested in the high-yield sector. The findings show how investment-grade fixed-income categories – sovereign, corporate and covered bonds and Schuldschein – remain the most important segment for Germany’s traditionally bond-heavy institutional investors.
More significant is that these investors are looking to emerging markets to mitigate the impact of low interest rates in the eurozone, where two thirds of investors view prospects as below-average or bad. About 41% of investors surveyed believe the outlook for developing countries’ investment-grade bonds over the next three years is good or very good.
Low interest rates are also driving a trend towards third-party mandates. Investing in more specialised asset classes such as emerging markets and convertibles typically requires the services of external managers. This trend is more prominent in real estate, where three-quarters of the €32bn is held in external funds.
“As traditional sovereign bonds no longer provide adequate returns, investors are increasingly shifting towards unconventional bonds segments – such as emerging markets, convertible bonds or multi-credit approaches. Very few investors have the necessary expertise to operate in these segments themselves and therefore rely on fund solutions,” said Said Yakhloufi, head of fund analysis at Scope.
“As traditional sovereign bonds no longer provide adequate returns, investors are increasingly shifting towards unconventional bonds segments – such as emerging markets, convertible bonds or multi-credit approaches."
The study also found that interest rates are the single biggest concern of investors and three quarters of those surveyed expect the current low-rate regime to persist until at least 2020.
A long-term comparison shows equity allocation has tumbled from 17% in 2001 to 5% in 2017. Although investors expect a slight increase to 5.5% by 2020, there seems little chance of it regaining its pre-crisis levels.
Major divergence in equity allocation between investors groups. For banks and insurers, equity represents only 3% of their portfolios. Among pension schemes it is around 14%; for churches and foundations the proportion is as high as 28%.
Emerging markets are also rated as the most positive for equities – about 75% of investors consider prospects good or very good. The European (73%) and German (71%) markets follow. For Japanese and North American equities, however, only around 23% and 32% of respondents respectively see the three-year outlook as good or very good.