Point of view: Investors must increase fixed income allocations

Published Nov 19, 2023


A return to favourable interest rates has reignited appetite for fixed-income assets, but current allocations are too low, new research from Aeon Investments, the London-based credit-focused investment company shows.

In its global study with pension funds, insurance asset managers, family offices, and wealth managers who collectively manage around $545 billion, it found more than half, 54%, believe allocations to fixed income are insufficient, with 17% saying they are “way too low”, and 37% saying they are “slightly too low”.

According to the report, respondents note the “difficult period” for fixed income in recent years but given the recent return to rising interest rates, the majority predict an increase in allocations to the asset class.

“More than three-quarters (78%) say professional investors will increase allocations to investment grade fixed income assets over the next 12 months. More than half (56%) say they will increase investments slightly, while 22% expect dramatic increases,”the report found.

Aeon Investment portfolio management head Khalid Khan said: “As central banks intervene to tackle inflation by raising interest rates, it is the perfect opportunity for investors to increase their allocations to fixed income.

“Equity markets are significantly more vulnerable in a world transitioning away from extraordinary monetary policy and quantitative easing. We expect corporate credit to be more resilient, given the contractual nature of returns".

Khan said historically, fixed-income markets have recovered far quicker from drawdowns than equities. The ‘pull-to-par’ effect as bonds reach maturity tends to cushion the impact of price falls and aid recoveries.”

“With yields from investment grade and high yield credit at a record 10-year high, fixed income can meet dual targets of achieving attractive income and managing investment risk.”

The survey said some 82% say professional investors will increase allocations to investment grade fixed income assets over the next three years, with 24% believing increases will be dramatic, while 58% predict slight increases.

“Respondents also predict an increase in allocations to high yield non-investment grade fixed income. Over the next 12 months, 48% say there will be slight increases while 28% say increases will be dramatic. There are similar expectations about allocations to high yield and non-investment grade fixed income over the next three years with 48% expecting a slight increase and 24% expecting a dramatic increase," it said.

The report said responses reflect the fact that nearly all (98%) respondents take the credit cycle into account when investing. Half of professional investors say they actively manage their portfolio to adjust for a downturn/upturn, while 48% say they invest in a manager who does so on their behalf.

“When looking at the advantages of investing in fixed income, two-fifths identified diversification from stock market risk as the most important, while one-third say capital preservation is the key reason to allocate to fixed income,” it said.