JP Morgan Survey: Despite Obstacles, European Institutions Remain Committed to Fixed-Income

(November 10, 2011) — European institutions are faced with concerns over interest rates, political risk, and portfolio risk in their fixed-income portfolios, according to a new survey by JP Morgan Asset Management.

However, these concerns will not cause institutional investors to reduce their fixed-income allocation, the firm found. 

Ravi Rastogi, a London-based director at Towers Watson Investments, supports the commitment to fixed-income among European institutional investors. “Many investors hold fixed-income allocations for risk mitigation reasons. In today’s environment, that need to have fixed-income hasn’t changed,” he told aiCIO, adding that the commitment to bonds is also being reshaped by the growing realization of the false definition of ‘risk-free.’ Sovereign bonds, once considered risk-free, clearly have risk, driving investors to apply diversification principles across the fixed-income universe, he asserted.  

Furthermore, Rastogi noted that the bond universe is sufficiently larger than European investors have initially accessed. “In line with many institutional investors worldwide, many investors in Europe have typically had home-biased fixed-income portfolios, but with changing regulations such as Solvency II, institutional investors are realizing that they are less tied to domestic investments, expanding globally.” 

According to JP Morgan’s survey, respondents noted that their main objective for allocating to fixed-income was stable returns, with 22% of those surveyed noting that they are concerned about the current low-rate environment. Meanwhile, 19% of respondents said sovereign/political risk is a worry. In addition, 19% said they are worried about managing portfolio risk and 13% are concerned about inflation/rising rates. However, despite their concerns, 73% said they would maintain or increase allocations by the end of 2011.

Nick Gartside, International CIO of Fixed Income at JP Morgan Asset Management said: “2011 has seen the almost unthinkable prospect of sovereign default arising in European markets including Greece, Ireland, Italy and Portugal. Meanwhile, concerns over the US economy and its level of borrowing have seen Standard & Poor’s downgrade US sovereign debt from triple-A for the first time in the country’s history. Against this backdrop, it is clear that fixed income investors are being taken into uncharted territory, which makes this report all the more timely.”

Additionally, the survey found that on average, European institutions allocate 56% of their overall portfolio to fixed income (twice their allocation to equity). More specifically, life companies hold the highest fixed income allocation (74%), while public pension funds hold 42% on average.

In a statement, Gartside continued: “The concerns raised by investors indicate they are facing a unique confluence of factors – low interest rates, inflationary pressures, sovereign default risk – that present challenges across all parts of the yield curve and appear to leave few ‘safe haven’ fixed income assets to move to. Faced with high market uncertainty, but also stringent liability and regulatory obligations, many institutions may decide that the best course of action is to sit tight. But it is also important to acknowledge that the Eurozone crisis has also created new opportunities for fixed income investors. Compared to five years ago, there is much greater differentiation between the credit risks posed by different sovereign issuers in the Eurozone.”