More than half of Asian institutional investors plan to increase their allocations to European and US investment-grade bonds in the next five years, research reveals.

The independent research carried out by Greenwich Associates for Fidelity Worldwide found Asian investors were willing to move up the risk spectrum in their fixed-income investments and were prepared to invest more in developing countries.

The search for income was a central motivation for these investors, with 65 per cent of Asian institutional investors reporting a decline in income yield over the past five years.

The research paper, The Age of Income: the growing importance of income investing in turbulent times, found that 56 per cent of Asian investors expected to increase exposure to European and US investment-grade bonds in the next five years.

In addition, 44 per cent of Asian respondents plan to raise their allocation to emerging-market investment-grade bonds.


Income and broad-base yield

A similar proportion of these investors also looked to extend the search for yield to their equity portfolio, planning to increase exposure to high quality equities with high-dividend yields.

Fidelity’s managing director for Asia (excluding Japan), Mark Talbot, says that the search for income was increasingly a focus of large investors and would be of growing importance in the next decade.

“Investors are reassessing their strategies as it becomes clear the world economy is in the midst of a fundamental restructuring,” Talbot says.

“Secular growth drivers are reshaping the balance of economic power. The demographics of longevity and ageing populations are intensifying the retirement saving imperative, while the financial-risk environment has been transformed by the 2008 credit crisis and the ongoing sovereign debt crisis.”

Not only is income expected to be a key driver of returns, but investors are also taking a whole-of-portfolio approach, searching for yield across asset classes, according to Talbot.

“In this environment, flexible fixed-income portfolios, quality-focused equity-dividend portfolios and commercial real-estate portfolios can offer greater yields without necessarily taking on significantly higher risk,” he says.

“For investors looking for an attractive compromise between stable yield and managed volatility without the concentrated risks to capital [that] reliance on a single asset class entails, a risk-aware multi-asset approach can offer a compelling solution.”

The paper’s findings are based on interviews Greenwich Associates conducted in June with 27 major institutional investors in Asia and 25 in Europe.

Institutions surveyed included large insurance companies, blue-chip-corporate and local-authority pension funds, including both define-benefit and defined-contribution schemes.


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