In the face of bruising market conditions, some fund buyers have opted for strategic fixed income allocation
It has been a consensus trade for yield hunters this year: buying emerging market debt. A net €54bn has already flown into the asset class this year. This contrasts with recent outflows from high-yield bond funds.
The rise of the passives looks unstoppable. Since 2008, assets in exchange-traded funds have increased from $772bn (€685bn) to almost $4trn, according to BlackRock. But this doesn’t mean active managers are cornered.
Fund buyers expect returns from their equity portfolio to be significantly lower over the next five years. However, they still expect equities to outperform bonds by a considerable margin.
Two thirds of institutional investors expect European companies to reduce their dividends or keep them unchanged this year, according to research conducted by Source, the ETF provider.
Investors are fleeing from emerging market debt, and optimism for any recovery in the near term is low, particularly for local currency government bonds.
Investors in the Netherlands have become enthusiastic users of index trackers over the past years. But institutional investors in the country are leading the way into a new trend – factor investing.
Marcel de Kleer of Wealth Management Partners in the Netherlands has swapped all but one of his active bond funds for passive solutions, he tells EIE’s Tjibbe Hoekstra in a video interview.
Consider the following: you come together with your investment committee, look at macroeconomic fundamentals, GDP growth trends and companies’ earnings forecasts, and you come to the conclusion that European equities are far more attractive than stocks elsewhere. However, you and your colleagues also agree that, with a rate hike in the US this year ever more likely and European monetary policy to remain loose, the dollar will come closer to parity with the euro. So what do you do? You buy currency-hedged share classes.
Equities and high yield bonds follow each other wherever they go, both when it comes to fund flows and returns, as we discussed last week on this site. The Barclays Global High Yield Index even followed stocks down on Monday in the aftermath of the breakdown of talks between Greece and its creditors. So, if high yield bonds behave more like equities than like investment-grade bonds, what does that mean for portfolio construction? Should the seemingly inseparable twins be placed in the same classroom or is it better to separate them?