Moving up the risk curve for yieldTraditional asset classes have slowly lost their lustre. Some areas of government debt have seen negative real yields while parts of the equity market have become too hot to handle for most as valuations have rocketed on the back of Trump’s election and a drop in sterling. In order to close expanding funding gaps and meet liabilities in a cashflow-starved environment, investors have had to either work their existing assets harder or look to new forms of income. In the fixed income space this has meant moving up the risk curve into higher yielding, illiquid securities sometimes carrying higher leverage. Popular choices among institutions include high yield bonds, infrastructure and other private market assets such as direct lending and leveraged loans. But with this search for yield has come concern from some quarters that investors are reaching too far to find it – and in doing so are teetering on the brink of sliding back into the murky pre-crisis world of high leverage and risk disguised as quality. Some people fear investors have begun to develop unrealistic expectations of the long-term returns that can be extracted from bonds without taking excessive risk. This roundtable discussion featuring asset owners, consultants and asset managers addresses the opportunities in fixed income and the various ways institutional investors are accessing them. It also considers the macro-economic factors at play and aims to shed light on the risks inherent in these strategies. As always, the importance of fully understanding an investment before allocating to the different areas of fixed income can never be emphasised strongly enough
Investors across the globe have been forced into new asset classes to deal with a backdrop of low interest rates and loose central bank monetary policy, not to mention the looming threat of inflation and heightened political risk.