Global asset manager Payden & Rygel anticipates renewed enthusiasm among UK pension fund managers for fixed-income investments.
The firm said the September 2022 UK mini budget – delivered to combat the cost of living crisis and followed by a sharp fall in the value of the pound sterling against the US dollar – was a turning point, putting bond strategies in the spotlight for the “first time in a generation”.
Renewed enthusiasm among UK pension funds for greater sophistication in bond allocations comes after more than a decade where fixed income was used mainly as a liability hedge, according to the asset manager.
“The low yields in liquid fixed income led many to explore allocations to private markets, sacrificing near-term liquidity for higher long-term yields. However, the yields spike across liquid fixed income following the mini budget put the spotlight on liquidity back,” said Mark Stanley, director, Payden & Rygel London.
Schemes want adequate liquidity for collateral calls and are more prepared for buy-out opportunities, said Stanley. “Multisector fixed income portfolios offer attractive yields in sterling terms while taking on relatively little interest rate risk; 6 to 8% yields are achievable, and these can be enhanced through dedicated allocations to high yield bonds and emerging markets debt,” he added.
Fixed income assets are not immune to challenges from global central bank tightening policies or other factors including recession risks and price effects of the green transition, cautioned Nigel Jenkins, managing director at the firm.
However, following the widely observed increased correlation between bonds and equities last year, Jenkins argued the stability that fixed income can provide to equity and other portfolios with higher risks, should return.
“Whilst inflation volatility may be a bigger issue on average over the next ten years than it has been over the last 20, for the most part we think it will once again be economic growth expectations that will be the dominant factor. And in that environment, fixed income assets should again provide stability in a balanced portfolio allocation.”
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