Nearly nine out of 10 institutional investors (88 per cent) have some degree of concern that inflation will erode the real value of bond yields over the next one to two years, according to new research by Managing Partners Group (MPG).
Half (50 per cent) of all the respondents say they will increase their exposure to higher-yielding assets such as fixed income asset backed securities (ABS) because of their concerns about rising interest rates. This compares with 37 per cent who said they would do so a year ago.
Latest data shows that annual inflation in the Euro area reached 2.0 per cent in June, which was the highest rate since February 2017 and represented a rise on the 1.9 per cent recorded for May. In the UK, inflation as measured by the Consumer Price Index was 2.4 per cent in May.
Jeremy Leach (pictured), Chief Executive Officer at MPG, says: “Inflation is creeping back into western economies and institutional investors will have to adjust their bond and equity portfolios to deal with the headwinds created by monetary policy normalisation and rising interest rates.
“In this scenario, fixed income Asset-Backed Securities (ABS) offer an attractive strategy, with yields high enough to counter rising inflation while being secured against real underlying assets, which is reassuring for investors. This flourishing sector also offers a range of yields and risk profiles to suit a wide range of appetites.”
The research also reveals that three in ten (31 per cent) institutional investors would consider investing in Unitranche Debt, whereby ‘senior’ and ‘junior’ components of the structure offer different yields and risk exposures. On average, respondents in the survey identify the ‘sweet spot’ for the yield on senior debt instruments to be 3.69 per cent and 7.05 per cent for junior instruments.
Three in five (60 per cent) of institutional investors expect their exposure to ABS to rise over the next three years. The most attractive quality driving demand growth in Europe is the fact that ABS are secured against realisable underlying assets, which was cited by 38 per cent. Other reasons mentioned include: they are an attractive substitute for unsecured high-yield corporate debt (35 per cent); they meet a range of investor appetites for risk and return by offering both senior and junior tranches of credit exposure backed by the same pool of assets (29 per cent); their market prices are generally stable (19 per cent); and they offer diversification benefits (25 per cent).
In terms of factors driving increasing supply, over half (52 per cent) of respondents recognise the role of ABS generally in offering an alternative to lending by banks and 27 per cent say that the European Union would support the ABS sector because it has an important role to play in financing SMEs. Nearly two in five (38 per cent) believe fund managers would use ABS to raise assets under management in their funds, 35 per cent say demand would be driven by an increasing number of lenders looking to issue mortgage-backed securities and 25 per cent point to the strong growth in fintech companies, including alternative lenders that prefer to raise capital via ABS.
MPG manages over USD500 million in a range of alternative and hedge funds. With more than 45 years combined structured finance know-how, it also offers its expertise in arranging securitisation transactions.
MPG opened an office in Malta in 2015 to launch a securitisation platform for the issuance of ABS by its asset management and third-party buy-side clients. A key factor in this decision was Malta’s Securitisation Act, which established the country as the only European Union jurisdiction outside of Luxembourg with the legislation in place to offer these flexible tools.
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