Institutional investors predict a shift in the bonds and equities relationship

By Newsdesk

March 08 2024
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A new study from Managing Partners Group (MPG) reveals a significant shift in the perceptions of institutional investors and wealth managers regarding the correlation between bonds and equities.

Institutional investors predict a shift in the bonds and equities relationship

According to the research, 43% of respondents anticipate an increasingly negative correlation between these two asset classes over the next 12 months, marking a possible reversal of the recent trend where both had moved in tandem.

The survey, which included professionals managing assets worth €107 billion, indicated mixed expectations for the future relationship between bonds and equities. While a considerable number foresee a more distinct divergence, 31% expect the correlation to become increasingly positive, and a further 24% believe it will remain unchanged. Just 2% of the participants were undecided.

This expected change comes amid growing concerns of a recession in major economies, leading to a heightened interest in long-duration core fixed income assets. These assets are seen as offering a trifecta of portfolio diversification, attractive yields, and capital appreciation potential. According to the study, approximately 69% of those surveyed expect to increase their allocations to these assets in the upcoming year.

Investment grade corporate bonds from the US and UK Government bonds currently lead the preferences for fixed income asset classes, due to their appealing risk and return profiles. Other highly rated bonds include Swiss Government bonds, EU Government bonds, and UK investment grade corporate bonds.

The study also delved into expectations around credit ratings and downgrades, with most professional investors predicting these to align with historical trends amid the global economic slowdown. This belief is supported by companies' generally robust balance sheets, which may help to mitigate the effects of a slowdown.

In response to changing market conditions, MPG has diversified its Melius Fixed Income Fund by adding life settlements alongside corporate and high yield bonds. Life settlements, which are US-issued life insurance policies sold at a discount before their maturity, offer minimal correlation to equities and bonds. This move reflects a broader trend towards alternative asset classes as investors seek to hedge against a challenging year for equities.

Jeremy Leach, Chief Executive Officer at MPG, commented on the findings, stating, "There have been signs that the recent positive correlation between bonds and equities is going into reverse and that is a trend that investors expect to continue over the next 12 months." He highlighted the dual factors of recession concerns and robust corporate balance sheets as key drivers behind the shift towards longer-duration core fixed income assets.

The Melius Fixed Income Fund, which includes investments across the USA, UK, Europe, and Switzerland, has posted a return of 7.72% in the 12 months to January 2024. This performance notably outstrips the iShares Core US Aggregate Bond benchmark by 5.39%, emphasizing the fund's successful strategy of lessening sensitivity to interest rate movements through a yield-driven investment approach.

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