Institutional investors have been forced to decide whether they will rebalance to their pre-crisis equity allocations, which has thrust the traditional alternative in to the spotlight. “The fixed income asset class is now getting its fair share of attention amongst investment consultants, fund researchers and trustee boards…and about time too!” exclaimed Simon Doyle, Schroder Investment Management head of fixed income and multi-asset, last month. However, this re-assessment of fixed income is not always resulting in new, alpha-seeking active mandates. In fact, many investors seem determined to make fixed income truly ‘defensive’ again, as MICHAEL BAILEY reports.

There has been a bifurcation in the types of fixed income portfolios being demanded by investors, observes Dean Stewart, head of the fixed income division at Macquarie Funds Group. “You’ve got your investors who loaded up on high yield securities and hybrids, who really took on equity-like risk in their fixed interest allocation, then got burnt and now just want a plain vanilla, benchmark-hugging mandate that’s heavy on Treasuries. On the other hand you’ve got the guys who can see the opportunities emerging from the dislocation in credit markets.”

Macquarie being Macquarie, Stewart’s shop is catering to both kinds of fixed interest customer, and his credit boss Brett Lethwaite happily reports the fixed income division has raised more in the last six-month period (“multiple billions”) than it ever has before. In particular, Macquarie’s Debt Market Opportunities Fund No.1 made a name for itself buying Australian mortgage-backed securities about 18 months ago, when many of the offshore banks that had bought the securitised parcels became forced sellers. “We were hoping for 1 or 2 per cent outperformance [of cash] but it’s ended up being 5 or 6 per cent”, Lethwaite says. His team has been flipping the profits of MBS sales into investment-grade credit, where spreads might have come back from 500 bps over bank bills to the mid-200s, but as AustralianSuper’s fixed income chief John Hopper says, still represent “recessionary” pricing.

Hopper concedes “the easy money in credit has already been made”, but Franklin Templeton pointed out in a recent white paper that when a bellwether like the Barclays Capital US Corporate Index has a long term average spread of just 166 bps above government bond yields, there is still a ways for spreads to go. “In addition, corporate bonds may still provide relatively attractive current yields, as tighter spreads have been partially offset by higher government bond yields,” the paper states. However that same white paper highlights the “idiosyncratic risk of individual bond issuers in this uncertain economic environment”, while conceding continuing spread volatility. To an observer like Richard Borysciewicz, the local chief of global bond house Credit Agricole Asset Management, this explains why a certain school of institutional investor “just wants to save money with bonds” and seek active returns elsewhere.

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