DB investors to use alternative credit for both opportunistic, structured allocation

The use of alternative credit within defined benefit (DB) portfolios is used for both opportunistic investing and tactical asset allocation, research shows.

A report, produced by CREATE-Research, into investor views on asset allocation and emerging markets found that while asset classes generally fall into either category, alternative credit is used in both.

The same was found in emerging market equities.

Research among 700 pension funds, pensions consultants, asset managers and sovereign wealth funds found 56% would use alternative credit for medium-term investing, matched with 48% for short-term opportunities.

Within emerging market equities, 50% would use the asset class for tactical asset allocation, and 53% for opportunism.

Emerging market corporate bonds were also picked by the majority of investors for opportunistic investments, compared with only 26% that would hold a medium-term allocation.

The research, sponsored by Principal Global Invetsors, also looked at investor views on emerging markets.

It found the proportion of investors looking for bond and equity opportunities in emerging markets jumped between 2012 and 2014.

In 2012, only 15% of respondents said they would use emerging market bonds for opportunistic investing, compared with 51% in 2014, while over the same period those who would use them for buy-and-hold investing dropped from 44% to 34%.

Jim McCaughan, chief executive of Principal Global Investors, said he interpreted this development as an indication of banks’ weakness.

“Emerging market corporates that needed debt five years ago probably went to a European bank,” he said.

He said, due to the financial crisis and regulatory changes, the shift away from banks had led to an increase in issuance for investment management firms and pension funds.

“This included local currency, so investors are seeing this issuance, but also the volatility, and use it opportunistically rather than structurally,” he said.

“You can also play them both long and short on currencies, as well as on the bonds.”

The report also highlighted a growing consensus among institutional investors of a divergence between emerging economies and how different markets will grow in future.

Sentiment for China remained strong. However, fellow BRIC nations India, Russia and Brazil all saw significant negative sentiment.

Investors also expected developed and emerging economies to see a convergence among asset-class correlation and liquidity, but for buy-and-hold investing to remain a developed market concept.

“This suggests a lot of trust in markets, or at least in the inevitability of adopting the Western system,” McCaughan said.

“I’m not sure if that’s correct, but there is a widespread belief global best practices will spread to emerging markets.”