European Bond Investors Tilt Portfolios Toward Return-Enhancing Substitutes
February 28, 2022 — London
Inflation will continue driving product innovation as investors grow more accustomed to trying different options to safeguard returns
Fixed-income investors in Europe are rethinking their approach in the face of rising inflation and the strong likelihood of monetary tightening by central banks, notes the latest issue of The Cerulli Edge―European Monthly Product Trends.
Fixed-income investing has traditionally been a relevant feature of investors’ allocations in several European countries. For example, 41.2% of the assets under management (AUM) held by local managers operating in Italy at the end of 2021 were in bond funds, according to the Italian investment association, Assogestioni. Similarly, bond funds accounted for 25.2% of locally managed assets in Spain last year, according to Inverco data, compared to 18.3% in equity funds.
However, 2021 was a challenging year for traditional bond investors. The Bloomberg Barclays Global Aggregate index was down 4.7% after returning 9.2% in 2020. This contrasts with global stock markets, where many indices registered all-time highs. For example, the S&P 500 was up 26.9% and the FTSE All-Share and MSCI Europe ex-UK rose by 14.6% and 25.4% respectively.
In response, fixed-income investors have been recalibrating the compass of their allocations to bond products. “Strategies that have seen a rise in investor interest and AUM include shorter-duration, high-yield, inflation-linked, and foreign-based approaches, particularly in Asia. Also, demand is increasing for strategies able to replicate the stability of cash flows associated with bond products, such as real estate and infrastructure,” says Fabrizio Zumbo, director, European asset and wealth management research at Cerulli Associates.
In light of the current macroenvironment, bond investors have also tried to pursue a wider geographical allocation, but this has been met with mixed fortunes. For example, those investing in China, and Asia more widely fared reasonably well in 2021. In contrast, products offering exposure to European emerging markets, for example sovereign bonds issued in Poland, the Czech Republic, Hungary, and Romania have suffered.
Some investors are looking beyond the traditional asset classes. “The fixed-income client base, even in more conservative markets, such as Italy and Spain, has shown increasing interest in opportunities in the alternatives market, for example in real estate or infrastructure,” says Zumbo.
Cerulli expects the current market climate will continue to drive product innovation as investors grow more accustomed to trying new things in order to generate better returns.
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