Asian institutions not rolling with the great rotation

Asian institutions raised their allocations to fixed income in Q1, including domestic government bonds and listed bond funds – in stark contrast to their US counterparts and bucking a widely anticipated great rotation into equities.

Regional investors increased their allocations to domestic government bonds, listed bond funds, global government bonds, mezzanine debt and other debt instruments, finds a survey from AMP Capital, which is forecasting that this growth in fixed income allocations in Asia will continue in Q2.

Only 17% of Asian investors increased their allocations to equities in Q1, with the figure expected to remain the same in the second quarter. Likewise, just 13% of US investors say they will raise their exposure to stocks, down from 28% in Q1.

European and emerging market institutions are comparatively more bullish, with a respective 23% and 28% planning to raise their equities investments in Q2.

The trend has been termed as the “not-so-great rotation” from bonds to equities by AMP. Though it does note shifts taking place within fixed-income portfolios, with one trend being a move from bonds into high-yield corporate debt.

Of the 62 institutions worldwide surveyed by AMP, 79% say they had no plans to move out of cash and fixed income this year. However, the mix of respondents is largely skewed towards pensions (48%) and insurance firms (13%) which have long-duration liabilities, followed by sovereigns (10%) and foundations/endowments (10%) and family offices (3%).

“Institutions with set, well-defined liabilities such as pensions and insurance firms need to invest in assets that have a steady rate of return with stable capital and thus they remain in fixed income,” says the report by AMP, the Sydney-based investment manager which runs $130 billion in assets.

A slightly different viewpoint was recently given by BlackRock chief executive Laurence Fink during a visit to Hong Kong.  

He maintains that although the “great rotation hasn’t even started yet”, the fund house had seen more than $20 billion of inflows to equity-based exchange-traded funds in the first three months of the year, of which institutions accounted for 70%. BlackRock’s iShares unit is the world’s biggest provider of ETFs.

AMP believes that direct infrastructure holdings would also benefit from an increase in allocations to fixed income, although Asian investors are the least apt to invest.

Nearly half (46%) of investors from Europe are expected to increase their allocations to real assets this year, compared with only 18% of those from Asia, and 28% from the Americas.

The Europeans are expected to focus on infrastructure and infrastructure debt, two areas of interest to Asian investors in addition to real estate.

AMP runs a range of investment products, but specialises in real estate and infrastructure. It launched an infrastructure debt fund last year.

With no clear visible onset of the great rotation, managers across various asset classes will try to stake a claim to the hearts and mindsets of institutions.  

BlackRock’s Fink believes both institutional and retail investors alike should shift away from bonds into ETFs. Meanwhile, Aberdeen AM observes that US institutions are taking greater interest in emerging corporate bonds, while Cerulli Associates foresees a rise in mutual fund inflows.

However, equities have not faded from the horizon, with Goldman Sachs Private Wealth Management taking a bullish view on US equities, as have US hedge fund managers.