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4 Emerging Trends in Fixed Income Investing: State Street

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What You Need to Know

  • Respondents plan to increase their use of indexing, ETFs, ESG strategies and Chinese sovereign bonds.
  • Currently, less than a third of respondents report using index strategies for their fixed income allocations.
  • Respondents expect to use ETFs for their increased ESG allocations.

Four new trends are emerging among institutional investors in the fixed income market, according to a new report from State Street Global Advisors: more indexing; more ETFs; more environmental, social and governance (ESG) strategies; and the addition of Chinese sovereign bonds along with more emerging market bonds.

“In the search for yield, institutional investors are shifting their portfolios to incorporate fixed income at a lower cost, and accompanying that shift is a focus on yield, liquidity and transparency,” said Gaurav Mallik, chief portfolio strategist for SSGA, in a statement. Institutional investors are essentially doing what many retail investors have already done.

SSGA, a leading indexing and ETF asset manager, surveyed nearly 360 senior management and senior portfolio managers at a variety of global institutions including pension funds, sovereign wealth funds, wealth managers and asset management firms, asking about their planned allocations over the next three years.

More Fixed Income Indexing

Two-thirds said they are prioritizing the increased use of indexing for broad or liquid core fixed income exposures. In North America, the percentage was 71%. Less than one-third currently use fixed income index strategies.

Forty-four percent plan to increase index allocations to high yield, while 35% to 37% plan to increase index allocations to sovereign debt funds, emerging market debt, global aggregate/core and investment grade corporate debt.

In addition to lower costs, enhanced liquidity and reliability of benchmark returns, institutional investors cited a lack of “complete satisfaction with the current active fixed income strategies,” according to State Street.

More Bond ETFs

Nearly 70% of respondents said they are prioritizing the increased use of ETFs in their portfolios with an almost equal share planning to add or boost their current ETF holdings within their global aggregate/core fixed income portfolios. About half said they plan to boost the use of ETFs within their non-core/satellite fixed income allocations.

Respondents cited ease of use, speed of execution, transparency, liquidity benefits and lower costs for increasing their allocations to ETFs.

ESG in Fixed Income

Sixty-one percent of respondents said integrating ESG factors in their fixed income portfolios is a priority. About half plan to use a “best-in-class” approach, and nearly 40% cited using “impact” approach, which would focus on those investments that would have a positive impact on environmental, social or governance issues. Close to 60% said they are most likely to use ETFs for their ESG fixed income allocations.

“The survey confirmed that ESG has become a clear priority for fixed income investors,” the report states. It noted that North American institutional investors were mostly likely to prioritize “deeper/more comprehensive ESG integration” within their developed market sovereign debt allocations.

Chinese Sovereign, Other Emerging Market Bonds

Starting in October, FTSE Russell will add Chinese sovereign bonds to the FTSE World Government Bond Index (WGBI), which, according to State Street, will open that market up to global institutional investors. More than a quarter (27%) of survey respondents said they are prioritizing the development of a dedicated, standalone fixed income exposure for China. That priority was most expressed by those with the highest level of assets under management.

Institutional investors are most likely to use both active and index strategies for the emerging market debt allocation of their fixed income portfolios.