In response to today’s shifting markets and portfolio duration, more than half of institutional investors (51%) are increasing their allocations in bank loans and 42% are growing their allocations to inflation-linked bonds over the next 12 months, according to a new survey from State Street Global Advisors.
The global survey of more than 700 pension funds, endowments, foundations and sovereign wealth funds, as well as wealth and asset managers, found that as of mid-year 2022 there was growing appetite for new systematic fixed income strategies as private credit continues to boom.
At the expense of other active fixed income strategies, more than half (59%) of investors exploring systematic and data-driven strategies as a way to boost performance.
“Our research confirms that with the dramatic rise in yields, investors are concerned about how to balance risk and return within their portfolios, leading them to look beyond traditional public fixed income investments,” said Gaurav Mallik, chief portfolio strategist for State Street Global Advisors, in a statement. “Now is the time for institutional investors to be strategic with their allocations, and they are finding increased opportunity to pair private assets with liquid publicly traded exposures. As investors navigate this volatile time, we are well-positioned to help them access these new approaches, meet their key objectives and manage their allocations and flows.”
SSGA found in its survey that four-fifths of investors have increased their private credit exposure over the last three years. Those allocations have largely been funded from public fixed income exposures, high-yield corporate credit, emerging market debt and cash.
Of course, liquidity concerns are top of mind as investors are pairing private credit allocations with high yield (52%) and cash allocations 47%. Roughly 51% said that they are focusing on higher-quality, more liquid core allocations. Officials said there does not seem to be a single preferred approach for handling increased liquidity risk, but the risk is being recognized, nonetheless.