Stating the case for fixed income and debt in multi-asset portfolios

When investing client capital, asset managers and life insurers rely on corporate and institutional banking partners to provide access to a wide range of assets and investment opportunities to achieve their mandates and deliver benchmark-beating returns.

While institutional investors typically allocate capital to equities, bonds and property, a broader toolset that leverages a more diverse asset mix, including corporate debt and other credit, is becoming increasingly relevant to create a diversified portfolio that delivers the targeted return profile. 

The global economy has struggled with growth in the sustained high-interest rate environment due to post-pandemic inflation, so institutional investors have preferred high-yielding government bonds. On the other hand, the sluggish and uncertain global economy has resulted in lower demand for funding from corporates and state-owned enterprises (SOE). The lower supply of debt assets has led to a build-up of liquidity, which has put pressure on pricing and reduced yields of corporate debt and credit assets.

Fixed income and credit markets offer good diversification, liquidity and capital preservation benefits, and greater flexibility to help achieve targeted returns from a multi-asset portfolio. 

Access to all the asset classes creates opportunities to find additional benefits like yield enhancement and greater risk-adjusted returns, provided asset managers find the right institutional investment partner that can create bespoke products to achieve their desired outcomes. 

These benefits are particularly appealing to smaller and more nimble asset managers, like hedge funds and private credit funds, as their higher risk tolerance and different investment philosophies open them up to the opportunities that structured products offer. An example would be where private credit is repackaged to add enhancements to structured products.

Public deals and larger transactions take place in open markets and include a greater number of participating counterparties which can lead to smaller allocations or investors missing out on allocations completely due to the competitive nature of the bidding and excess liquidity conditions currently experienced. The underlying assets, whether bonds or loans are usually more vanilla, and pricing is usually at finer levels, However, private credit is an alternative option, as negotiating bilateral terms to purchase an asset offers greater flexibility to manage risk in the private market and target higher returns.

Finding the right mix of large open market and private debt deals across the public and private sectors creates opportunities for both large and small asset managers. 

Africa, including South Africa, boasts an interesting opportunity set in this regard, particularly for international and local investors looking for exposure to infrastructure assets, like renewable energy or impact-related projects.

There is also rising activity in the local bespoke lending and bond markets due to the improved political climate and brighter economic outlook, which now offers, more stable returns for local and global investors.

Furthermore, as the interest rate cycle turns, and growth continues to pick up, will support increased lending as corporates, SOEs and governments look to fund new projects and growth initiatives, creating investment opportunities that asset managers cannot ignore.

From a local perspective, globalisation and offshore investing remain strong themes among South African investors as the hunt for diversification and a broader opportunity set drives more money offshore. It is therefore essential that institutional investors find products that will provide them with the relevant offshore exposures they want, being equity, credit or fixed income.

In this regard, asset managers must carefully consider how they combine asset classes to generate alpha and outperform benchmarks. Crafting multi-asset portfolios that tear down the silos inherent in the traditional asset management approach offers a more holistic approach to investing that creates cost efficiencies and ultimately delivers benchmark-beating returns.