NNIP casts doubt on fixed income managers

The majority of institutional investors believe fund managers will have mixed fortunes when interest rates start to rise, according to new research conducted by NN Investment Partners (NNIP). The research, conducted amongst NN Investment Partners’ panel of institutional investment managers, showed that only 3 percent have complete confidence in fund managers’ abilities to deal with the market conditions that lie ahead, while 6 percent said they have no confidence at all. Just over half (54 percent) of respondents expected several will struggle while some will deal with the new environment.

Of those who said they have little or no confidence in the ability of fund managers to deal with the market conditions that lie ahead, 50 percent said it was because few managers have the experience of dealing with the end of the credit cycle, while 17 percent said experience of rising interest rates was lacking.

Four out of five (80 percent) of institutional investors said fixed income managers would have to adopt a more flexible approach if they were to achieve a positive performance irrespective of the interest rate cycle.

With regards to high-yield fund managers, nearly one in five (17 percent) of institutional investors have little or no confidence in their abilities to deal with an environment of rising interest rates and only 2 percent have total confidence in them.(2) Just over half (52 percent) said some managers will struggle in a tightening market but others will deal competently with it while 29 percent thought managers would generally be fine.

Just over a third of respondents (35 percent) thought credit fundamentals in high-yield credit would deteriorate over the next two to three years while 22 percent thought they would improve and 39 percent said they would stay the same. Most investors (57 percent) said high-yield could be used to enhance income generation, however, while 39 percent said the sector could be used to improve duration exposure and 26 percent geographic exposure.

Sylvain de Ruijter, head of global fixed income at NN Investment Partners, commented: “The current environment is very different from the last US tightening cycle, given the long period of very low interest rates and extensive quantitative easing that we have seen. A Fed tightening cycle, if it comes, may well be very different from earlier cycles, something that few fund managers have experienced. The challenge will be to understand what is going on and to adapt. A low-yield environment requires a more active investment approach, and this is what we are advising our clients, not only in fixed income but multi-asset as well.”

The search for quality yield from fixed interest assets is challenging the minds, processes and return targets of many institutional investors, says NNIP by way of summing up. The current volatility in markets makes the search for yield extremely difficult. It means the need for active management, to which we are committed, is increasing.

Whilst yield challenges remain, NN Investment Partners says it believes that there are still fixed interest opportunities without investors having to ramp up risk levels. Institutional investors will benefit from a partnership with fixed income experts who have a proven track record of identifying opportunity in adversity and translating that into returns.