Report: Institutional Investors Plan to Increase Indexed Fixed Income Exposures
July 21 2021 - 7:30AM
Business Wire
State Street Global Advisors’ Survey Further Highlights
Expected Rise of ETFs for Fixed Income Allocations, as well as the
Integration of ESG in Fixed Income Strategies
State Street Global Advisors, the asset management business of
State Street Corporation (NYSE: STT), today announced the results
of a global survey that shows institutional investors have an
increased appetite for indexed fixed income strategies across a
multitude of major investment themes, including the fast-growing
environmental, social, and governance (ESG) theme.
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The findings revealed 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.
“The findings of our research validated trends we’ve observed
playing out among institutional investors recently,” said Gaurav
Mallik, chief portfolio strategist for State Street Global
Advisors. “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.”
The Move to Indexed Fixed Income
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 confirm 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:
- A majority (76%) of survey respondents have less than 30% of
their fixed income portfolio currently allocated to index
strategies.
- Two-thirds (66%) of respondents are prioritizing increased use
of indexing for broad or liquid core fixed income exposures over
the next three years. Slightly fewer (63%) respondents are
prioritizing increased use of indexing for less liquid,
non-core/satellite fixed income exposures over the same time
frame.
- More than one-third of survey respondents plan to increase
their allocation to each of the following index strategies over the
next three years: high yield (44%), developed market sovereign
(37%), emerging market debt (36%), global aggregate/core (35%), and
investment grade corporate (35%).
ETFs in the Fixed Income Toolkit
Institutional investors have plans to increase ETF use within
their fixed income portfolios. The report found that:
- More than two-thirds (71%) of survey respondents have a strong
appetite to increase the use of ETFs within their global
aggregate/core fixed income portfolios in the next three
years.
- Nearly half (48%) of respondents have a strong appetite to
increase the use of ETFs within their non-core/satellite fixed
income exposures in the same time period.
- In addition, more than two-thirds (68%) of respondents say they
are prioritizing increased use of ETFs for fixed income portfolio
construction in the next three years.
ESG Moves Toward Full Integration
ESG is a mainstream consideration for institutional fixed income
investors. Among its other benefits, ESG is seen as providing a
quality lens through which to view fixed income strategies. The
survey found:
- Six in ten (61%) respondents say that they are prioritizing the
integration of ESG factors within their fixed income portfolio in
the next three years.
- A variety of approaches are used to incorporate ESG issues into
fixed income portfolios, with the “best-in-class” approach (cited
by 49%) and “impact” approach (cited by 39%) being most frequently
employed.
- More than half (58%) of respondents say they are most likely to
use ETFs as their preferred fund vehicle for increasing allocations
to fixed income ESG strategies in the same time frame.
China, Emerging Markets Come Online
In October 2021, Chinese sovereign bonds will be added to the
FTSE WGBI, opening a major new section of the fixed income market
to institutional investors. China’s inclusion in this index also
points to a normalization of investment and operations, as well as
a normalization of liquidity and hedging requirements.
- More than a quarter (27%) of survey respondents currently
prioritize development of a dedicated, standalone fixed income
exposure for China in the next three years.
- Not surprisingly, respondents from firms with the highest
assets under management are more likely to be developing a
dedicated China exposure.
- Institutional investors are most likely to use a combined
active/index strategy for the emerging market debt segment of their
fixed income portfolio.
About the Survey
This survey was conducted online in May of 2021. There were 360
respondents who were limited to senior leaders and senior portfolio
managers who are directly involved in fixed income portfolio
construction and investment decisions at pension funds, wealth
managers, asset managers, and sovereign wealth funds. For more
information, see the full report:
www.ssga.com/insights/fixed-income-research.
About State Street Global Advisors
For four decades, State Street Global Advisors has served the
world’s governments, institutions and financial advisors. With a
rigorous, risk-aware approach built on research, analysis and
market-tested experience, we build from a breadth of active and
index strategies to create cost-effective solutions. As stewards,
we help portfolio companies see that what is fair for people and
sustainable for the planet can deliver long-term performance. And,
as pioneers in index, ETF, and ESG investing, we are always
inventing new ways to invest. As a result, we have become the
world’s third-largest asset manager with US $3.9 trillion* under
our care.
*This figure is presented as of June 30, 2021 and includes
approximately $64 billion of assets with respect to SPDR® products
for which State Street Global Advisors Funds Distributors, LLC
(SSGA FD) acts solely as the marketing agent. SSGA FD and State
Street Global Advisors are affiliated.
Important Risk Information
All forms of investments carry risks, including the risk of
losing all of the invested amount. Such activities may not be
suitable for everyone.
The information provided does not constitute investment advice
and it should not be relied on as such.
© 2021 State Street Corporation - All Rights Reserved
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Media:
Olivia Offner 1-617-662-0198 ooffner@statestreet.com
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