Bonds are back among asset allocators, according to a study by PGIM Investments in which they canvassed the opinions of gatekeepers across Asia and Europe.
More than two-thirds of gatekeepers believe fixed income will reclaim its position as ballast to offset equity volatility after its negative correlation with bonds broke down last year, while more than half expect bonds to experience an upturn in performance over the next year.
PGIM Investment’s Gatekeeper Pulse study canvassed the views of 210 Asian and European gatekeepers at large global financial institutions, all of which have assets under management of at least $1bn.
According to the study, nearly nine in 10 fund selectors cite a peak in interest rates as the reason for their penchant for bonds, while almost as many cited falling inflation data.
Just over half of all respondents expect to increase allocations to green bonds, although the figure is lower at 45% in Asia, while in Asia the most popular pick is emerging market debt at 51% compared with the figure of 40% overall.
From an asset allocation perspective, fixed income was unsurprisingly the top pick at 58%, followed by public equities and cash/money markets at 38% and 36% respectively.
This was followed by private equity, private debt and hedge fund/liquid alternatives at 35%, 33% and 32% respectively.
Unsurprisingly, commodities and real estate were the most out of favour at 22% and 18% respectively.
In terms of investment themes, ESG came out top as it was cited by nearly two-thirds of respondents as the highest investment theme, although this was skewed by European fund selectors, where 73% cited it as the priority investment theme.
In Asia, AI was more popular, cited by 60% of fund selectors versus 49% in Europe.
Unsurprisingly, for both themes, public equity ranked as the option most likely to be utilised, favoured by 78% for thematic investing and 80% for AI.
“Bonds are back in the eyes of Asian investors. Following over a decade of ultra-low interest rates, our PGIM fixed income team expects developed market rates to hover within the traditional long-term range of 3%-5% for a sustained period. Should this materialise, the team expects investment grade returns in the mid-single digits for the foreseeable future, with high-single-digit returns for higher-risk sectors,” said Jessica Jones, head of Asia.
“With the majority of rate hikes now in the rear-view mirror, we could also see reduced fixed income volatility and a re-emergence of the ‘search for yield’ – which can provide an additional performance boost for active bond strategies.”