Institutional investors have ‘increased appetite’ for indexed FI strategies – SSGA

Institutional investors have an “increased appetite” for indexed fixed-income strategies across a multitude of themes such as environmental, social and governance, according to State Street Global Advisers (SSGA).

Its global survey of institutional investors found that exchange-traded funds (ETFs) are becoming an important fund vehicle for fixed income portfolio construction. The survey also found that investors believe the liquidity and price discovery benefits of fixed income ETFs became more attractive after witnessing Covid-19-driven market turbulence in Q1 2020.

According to the report, Fixed Income: Preparing for the Big Shift, while institutional investors still see value in active fixed-income portfolio management, active approaches are increasingly under pressure to deliver alpha, and investors are interested in maximizing yield while minimizing costs and risks. The findings are based on a survey of global pension and sovereign wealth funds, as well as wealth and asset managers.

SSGA chief portfolio strategist, Gaurav Mallik, said: “The findings of our research validated trends we’ve observed playing out among institutional investors recently. In the search for yield, institutional investors are shifting their portfolios to incorporate fixed income at a lower cost, and accompanying that shift is a focus on yield, liquidity and transparency. As an indexing and ETF leader, we remain well-positioned at the forefront of these trends, and we are dedicated to helping clients navigate this upcoming shift and achieve their goals.”

In addition, the survey findings confirmed that indexed fixed income is delivering strong value accessing the sectors and building blocks that investors find useful in a cost-effective and transparent way. Respondents confirmed that while active management of fixed-income strategies still dominates, there is a strong interest in adding index exposure which translates to both a challenge and an opportunity for a shift to indexing in an evolving fixed income market.

For example, a majority (76 per cent) of survey respondents have less than 30 per cent of their fixed-income portfolio currently allocated to index strategies. Sixty-six per cent of respondents are prioritising increased use of indexing for broad or liquid core fixed income exposures over the next three years. Slightly fewer (63 per cent) respondents are prioritizing increased use of indexing for less liquid, non-core/satellite fixed income exposures over the same time frame.

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