As the latest data showing US inflation is 5.4% versus 1.4% in the calendar year 2020 and 2.3% in 2019, new research commissioned by Managing Partners Group shows more than three in five professional investors in Europe plan to cut their clients’ exposure to bonds over the next year.
More than three in five (61%) of professional investors in Europe – including wealth/financial advisers, fund managers and institutional investors – plan to cut their exposure to bonds over the next year, according to new research commissioned by Managing Partners Group (MPG), the international asset management group. Only one in six (17%) plan to increase it over that time and 22% will keep it about the same.
Just over seven in 10 (71%) of those planning to reduce exposure to bonds will redirect the investments to real estate, followed by commodities (59%); Life Settlements (42%); hedge funds (22%) and equities (22%).
Virtually all (99%) of the respondents have some degree of concern that inflation will reduce the real value of bond yields over the next one to two years, with 17% saying they are ‘extremely’ concerned. Two in five
(38%) see higher inflation over this period and 46% expect it to remain around the same levels. Seven in 10 (70%) 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%) of the professional investors recommend allocating between 31-40% of portfolios to bonds, while 25% recommend allocating 41-50% and 21% recommend 21-30%.
Jeremy Leach, Chief Executive Officer, Managing Partners Group said, “The latest official inflation rate in the US is 5.4% 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
research1 shows more than seven in 10 (72%) of respondents anticipate that European managers will increase their allocations to alternative asset classes over the next three to five years.
Seven in 10 (70%) say an important reason for this is the growing transparency around alternative asset classes, while 65% cite an increased search for investments with low correlations to traditional asset classes and 57% 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% of European professional investors would now consider investing in Life Settlements and 82% see institutional investors raising their exposure to the asset class over the next three to five years. Over half (54%) of the respondents believe Life Settlements can deliver consistently attractive returns and 49% 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% net of fees over the calendar year with no drawdowns in any month. It has returned 154.06% since it was launched in July 2009. The standard deviation in its performance has been 0.18% 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.