Smart Money Portent? Bonds Are Gaining Allocators’ Interest

Fixed income may be posting sluggish returns, but institutional investors are piling into the asset class and moving out of stocks, according to the latest from data provider Nasdaq eVestment.

The new study comes at a time when the Bloomberg Aggregate, the benchmark for bonds, is down 1.29% for the year, and the S&P 500 is up 14.8%. “There is a bifurcation of sentiment,” where asset allocations and investment returns are moving in opposite directions, notes one of the report’s authors, Russ Elliott, head of asset management market intelligence at Nasdaq eVestment, in an interview.

A crosscurrent is that searches for information by asset owners, via contacting advisers and other indications of interest, remain highest for stocks. Small wonder, in that U.S. large-cap shares enjoyed the largest returns in this year’s first quarter, about 40%, per the study. Various types of bonds had low single-digit or negative results.

But when it comes to actual investment flows, which reflect future expectations, the picture is different. Elliott says that high interest rates, now paid by fixed income, are a big attraction.

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Over the past four quarters, the top investment categories in terms of inflow were all fixed income: core (investment grade), core plus (asset-backed and junk bonds added in to juice the IG paper), passive core (bond index funds) and securitized (mortgage-backed and asset-backed securities), the report stated. Asian and European investors are showing the same trend.

What has suffered, inflow-wise? The biggest negative shift is for emerging markets passive funds, which had good inflows throughout 2023. But those turned negative in this year’s first period, after U.S. Federal Reserve Chair Jerome Powell indicated that the central bank had put a hold on rate cuts. EM stocks tend to do better when U.S. rates are lower.

Meanwhile, environmental, social and governance-oriented stocks and other ESG investment products had lower research activity in the U.S. in the first quarter, with interest much higher in Europe and Asia—perhaps reflecting the opposition among some politicians in the U.S. to ESG.

What about actual buying behavior? Not good either. Purchases of ESG products have ebbed worldwide since 2022, although Elliott pointed out that almost 40% of ESG-focused strategies saw positive inflows in the first quarter.

And alternatives? Commitments to purchase positions in private equity funds and other PE vehicles is more than double those of other alts in the first quarter.

This may signal a turnaround for PE, which has been at a low ebb as initial public offerings and other exits have faded. A recent Bain & Co. report predicted that excess cash committed to PE firms, aka dry powder, might soon be put to work buying up undervalued assets.