Over three in five Swiss asset managers plan to cut bond exposure as inflation persists

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More than three in five (61 per cent) of Swiss asset managers - including hedge and other fund managers, institutional investors and wealth advisers - plan to cut their exposure to bonds over the next year, according to new research( commissioned by Managing Partners Group (MPG), the Geneva-based international asset management group. 

Only one in six (17 per cent) plan to increase their exposure over that time and 22 per cent will keep it about the same.

Just over seven in 10 (71 per cent) of those planning to reduce exposure to bonds will redirect the investments to real estate, followed by commodities (59 per cent); Life Settlements (42 per cent); hedge funds (22 per cent) and equities (22 per cent).

Virtually all (99 per cent) of Swiss asset managers have some degree of concern that inflation will reduce the real value of bond yields over the next one to two years, with 17 per cent saying they are ‘extremely’ concerned. Two in five (38 per cent) see higher inflation over this period and 46 per cent expect it to remain around the same levels. Seven in 10 (70 per cent) expect the level of default risk of corporate bonds in the US and Europe to increase over the next year.

At present, one third (33 per cent) of asset managers recommend allocating between 31-40 per cent of portfolios to bonds, while 25 per cent recommend allocating 41-50 per cent and 21 per cent recommend 21-30 per cent.

Jeremy Leach, Chief Executive Officer, Managing Partners Group, says: “Our results are significant because Swiss asset managers are prolific investors in bonds and three out of five of them planning to reduce exposure just shows the level of nervousness in the market.

“The latest official inflation rate in the US is 5.4 per cent for the second month in row, so anyone who hasn’t made that over the last year has lost money in real terms. Inflation is high and expected to rise further, which can only cause a correction in bond markets.

“A defensive model used to be to reduce exposure to equities in favour of fixed income but high inflation like this is likely to affect the pricing of both fixed income and equities, making the need to consider alternatives more important than it has been for four decades.”

MPG expects alternative assets including commodities, real estate and Life Settlements will become increasingly attractive to investors. The research shows more than seven in 10 (72 per cent) respondents anticipate that Swiss wealth managers will increase their allocations to alternative asset classes over the next three to five years.

Seven in 10 (70 per cent) say an important reason for this is the growing transparency around alternative asset classes, while 65 per cent cite an increased search for investments with low correlations to traditional asset classes and 57 per cent point to dissatisfaction with the performance of traditional asset classes.

Life Settlements are US-issued life insurance policies that have been sold by the original owner at a discount to their future maturity value and are institutionally traded through a highly regulated secondary market.

The research commissioned by MPG also shows that 94 per cent of Swiss asset managers would now consider investing in Life Settlements and 82 per cent see institutional investors raising their exposure to the asset class over the next three to five years. Over half (54 per cent) of Swiss asset managers believe Life Settlements can deliver consistently attractive returns and 49 per cent say regulatory changes have made investing in them much safer.

The Life Settlements market increasingly includes high profile institutional investors and service providers, including Apollo Global Management, GWG Life, Vida Capital, Broad River Asset Management, Red Bird Capital Partners, Partner Re, SCOR, Berkshire Hathaway, Coventry First, Wells Fargo, Bank of Utah, Wilmington Trust and Credit Suisse Life Settlements LLC.

MPG’s High Protection Fund, which is an absolute return vehicle that invests in life settlements, recorded its best year in 2020, delivering 9.91 per cent net of fees over the calendar year with no drawdowns in any month. It has returned 154.06 per cent since it was launched in July 2009. The standard deviation in its performance has been 0.18 per cent since launch and its Sharpe Ratio of 2.82 reflects its excellent consistency in outperforming the risk-free rate. The fund has no initial charges or performance fees, which has given it a performance edge on competing funds within the Life Settlements sector.