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Fixed income set for market shift

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10 Jan 2022

Substantial flows into bonds during the third quarter point to a shift in institutional investor thinking, says Andrew Holt.

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Substantial flows into bonds during the third quarter point to a shift in institutional investor thinking, says Andrew Holt.

stock market volatility

Substantial flows into bonds during the third quarter point to a shift in institutional investor thinking, says Andrew Holt.

The past year has thrown up some divergent market ebbs and flows and the third quarter was no exception with institutional investors deserting active equities in favour of bonds and passive strategies.

Active equities reported net outflows of -$83.9bn (-£63.3bn) during the period, largely thanks to a -$67.1bn deficit in US actively managed shares, according to eVestment.

Equities listed outside of the US performed better with -$16.8bn of net flows, which was a big improvement on the -$51.9bn recorded in the second quarter.

However, momentum continued to build in the US passive market which welcomed +$9.6bn, while passive non-US products expanded +$25.5bn.

Institutional flows were also positive for fixed income strategies, despite the low interest rate environment – and possibly is an indication that expectations in this environment may be about to change.

US bonds saw in inflows of +$97.5bn, +$75.8bn for active strategies and +$21.8bn for passive products. Core, core plus, STRIPS, and short duration strategies led in terms of inflows to US fixed income, potentially a further hint of change in the rate environment in the near term.

Following this trend, non-US bonds also saw inflows during the quarter measuring +$52.3bn, +$48.8bn for active and +$3.5bn for passive. Allocations toward global unconstrained bonds, Europe corporate debt, emerging market corporate debt, and multi-asset credit accounted for the bulk of non-US bond inflows in the third quarter.

Elsewhere, global multi-asset and global equities were among the few non-fixed income universes to see Europe ex-UK investor inflows during the quarter.

In terms of style, redemptions from growth strategies outpaced redemptions from core and value.

Like in the US, investors in Europe redeemed largely from equity managers in the third quarter. US, emerging market, Asia-Pacific and Europe equity products all saw net outflows in aggregate.

Emerging market debt strategies, with outflows of -$5.2bn (-£3.9bn), were one of a handful of bond universes with Europe ex-UK redemptions during the quarter.

UK-domiciled investors were net allocators to a mixed bag: global multi-asset strategies, UK fixed income, European equities and bonds, and emerging market equity and debt in Q3, presenting a less settled picture.

Although interestingly, diversified growth funds and global tactical asset allocation strategies saw some of the largest UK investor inflows during the quarter: +$2.6bn and +$0.8bn respectively.

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