Evolving Investor Preferences for Fixed Income Investments

EXECUTIVE SUMMARY

Canadian institutional investors remain deeply committed to having fixed income assets in their portfolios, but their exposure to government and investment-grade corporate bonds continues to wane in comparison to less traditional sources of yield that offer the potential of higher returns like private credit and Emerging Market (EM) debt.

Although asset owners – from public and corporate pension plans to endowments and foundations – believe the primary goals of fixed income are to preserve capital and manage volatility in a diversified portfolio that includes equities, they also cite income generation as a growing priority in a low-interest rate environment that is not expected to change, even as central banks tighten monetary policy in the short term.

The same institutions also agree that allocations to higher-yielding fixed income must be weighed carefully given the potential peril of investing in them. For some, liquidity is the most critical factor in determining the appropriate mix of private versus public investments, while others seem more concerned with how to manage credit, duration and/or geographic risks that may be associated with their portfolios.

Beyond these considerations, asset owners recognize the importance of incorporating environmental, social and governance (ESG) criteria into their investment processes and portfolios, but it’s still “early innings” on this front when it comes to their fixed income holdings, and many say future adoption will be slow.

Granted, how much progress is made going forward may largely depend on the advice and recommendations of investment consultants, for whom asset owners overwhelmingly rely on to fill a new fixed income mandate. Even so, what seems to matter most to Canada’s pension plans, endowments and foundations is the experience, stability and track record of the investment team(s) employed to manage their fixed income portfolios.