Nearly two out of three (65 per cent) of UK pension fund professionals say they will retain or increase their current exposure to fixed income over the next three years despite uncertainty about the prospects for the asset class, according to research by independent alternative asset managers Aquila Capital.
The research shows 34 per cent of pension fund professionals plan to increase moderately their exposure to fixed income and 31 per cent intend to retain it at current levels over the next three years. Only 26 per cent say they are likely to decrease it, with 20 per cent intending to do so moderately.
The majority (53 per cent) of respondents reject the idea that a “great rotation” of investor capital from bonds to equities is taking place, with less than one in six investors (15 per cent) seeing a rotation and 32 per cent uncertain.
This stability in overall exposure to fixed income exists despite two thirds (66 per cent) of respondents regarding the asset class as “challenging” or “very challenging”. Key challenges cited by respondents with exposure to fixed income as “important” and “very important” include: rising interest rates (79 per cent); assessing credit quality (74 per cent); low yields (72 per cent); the threat of inflation (72 per cent); and achieving sufficient diversification (70 per cent).
Earlier this month Aquila announced the launch of the AC – Risk Parity Bond Fund, the world’s first risk parity strategy to focus solely on fixed income. It is a solution for investors who wish to retain substantial exposure to fixed income despite any challenges that may face the asset class. The fund’s objective is to offer investors long term stable returns regardless of the twists and turns in the economic and fixed income cycle. It targets a return of cash plus three per cent with annualised volatility of approximately 3 per cent.
The fund applies a systematic allocation method that does not rely on forecasts or duration targeting, while being as diversified as possible across instruments, return drivers, geographies and durations. It does this through investing with equal risk weightings across four uncorrelated types of fixed income asset. These are government bonds, corporate bonds, carry positions in emerging markets and inflation-linked bonds. These assets also have varying correlations with the economic and fixed income cycles. As such, this combination allows positive long term return targets regardless of whether rates are rising, falling or flat.
The fund, which is set up as a Luxemburg-based UCITS (SICAV) has a minimum investment of EUR50,000.