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Investors opting for passive bond strategies

19 Aug 2021

ETFs are becoming an increasingly popular way to navigate the fixed income markets, finds Andrew Holt.

Institutional investors are making big moves into indexed fixed income strategies following the Covid pandemic by increasing their usage of exchange-traded funds (ETFs), a survey has discovered. 

Most (66%) of the global institutional investors who responded – 82% of whom are pension funds – intend to prioritise indexing for liquid core fixed-income exposures in the next three years. 

Almost the same level of respondents – 63% – plan to adopt the same strategy for less liquid and riskier bonds.

Almost half (44%) intend to increase their exposure to high-yield index strategies, while 36% will be targeting passive emerging market debt strategies.

Respondents cited lower costs, greater efficiency and more transparent pricing for turning to passive strategies, especially as the survey claims that active managers are finding it harder to add alpha. This, of course, will be disputed.

The improving case for using fixed income ETFs came to the fore after institutional investors witnessed the Covid-driven market turbulence in the opening quarter of 2020.

The conclusion seems to be that while institutional investors see value in active fixed income, such approaches are increasingly under pressure to deliver alpha, while investors also want to keep costs and risks low.  

In general, the institutional investors surveyed were not satisfied with their current fixed-income strategies, a situation that hardened with the arrival of the pandemic, which placed many in a “liquidity crunch,” prompting a search for alternative strategies.

In addition, the survey discovered that ESG is a consideration for institutional fixed income investors, as it is said to provide a “quality lens” when assessing assets.

Six in 10 (61%) institutional investors said they will be prioritising the integration of ESG factors within their fixed income portfolio during the next three years.

A variety of approaches are being used to incorporate ESG issues into fixed income portfolios. The “best-in-class” approach, cited by 49%, and an “impact” approach, cited by 39% being the most popular.

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