Asia instos drop stocks for US fixed income in Q3

Institutional investors based in Asia were sizeable sellers of US and global active equities during the three months to the end of September, while opting to shift more assets into US fixed income funds, according to the latest data from data provider eVestment released on Tuesday (November 24).

Investors from Asia ex-Japan allocated a net $4.1 billion to US fixed income, “much of it driven by MBS (mortgage-backed securities), ABS (asset-backed securities) and corporate bond strategies,” noted Peter Laurelli, global head of research at eVestment, in the 'Traditional Asset Flows Report Q3' report*.

He added that investors in the region typically preferred hard currency products instead of those that included local currency fixed income exposures.

This continued a slow preference for fixed income from regional institutional investors. Over the previous four quarters they added a net 19.4% into US fixed income and a net 1.8% into Asia Pacific fixed income. In contrast, the investors sold down emerging market fixed income by 17.3% (although they added 1.9% in the third quarter) and decreased Asia Pacific equity positions by 7.8% on average.

The focus on US fixed income may suggest a desire to benefit from more defensive assets in a time of uncertainty, while the desire to do so in securitised and corporate bond products suggests a desire to still gain some level of yield while doing so. Certainly, the likes of life insurers have been looking at ways to improve their fixed income yields without adding too much risk to their portfolios.

Laurelli noted across the world US fixed income strategies were among the biggest beneficiaries. He said active US bond managers gained $139.4 billion in net inflows during the third quarter, and passive managers received a further $35.1 billion. US core bond funds were the most popular with global investors, seeing $41 billion of inflows, while corporate strategies gained $27.4 billion.

"[Institutional investors] they can take some currency risk to invest in US Treasuries instead of JGBs/Bunds, credit risk to invest in corporates, or prepayment risk to invest in MBS, or some combination thereof," added Mike Cho, a senior research analyst who worked on the report, in an emailed response to questions from AsianInvestor.

"These are some of the major themes driving flows, and importantly it is tough to arrive at just one answer [for why the US fixed income flows have risen." 

Cho added that it is important when viewing major inflows of assets to "keep in mind how performance has affected asset allocations. An asset outperforming some part of the portfolio significantly, assuming no change in the strategic asset allocation, will gradually trigger flows for rebalancing reasons". 

The strong flows to active bond managers stands in marked contrast to active fund management as a whole; global long-only active managers saw net institutional flows drop by $23.2 billion during the third quarter, and investors redeemed a whopping $200.3 billion from active equity funds.

US long-only equity funds accounted for nearly $142 billion of that sum; evidently few global asset owners saw much sustainable value in actively investing into US stocks, despite their good performance during the period.

JAPANESE CONTRAST

During the third quarter they are adding $2.2 billion or a positive 6.4% of their combined portfolios into US equity managers, said Laurelli. That took their 12-month net asset shift to 16.6% into US stocks.

The focus on US equities may reflect both the need of institutional investors from the country to locate more returns, given the zero-return rate offered by government bonds in Japan, and the fact that the basis swap rate between Japanese yen and the US dollar has become much more favourable since late 2019, making it relatively cheaper to buy US dollar assets and then hedge the currency risk.  

That said, while the investors modestly cut US fixed income by 0.3% in the third quarter, they raised domestic fixed income by 3.8%. That said, their 12-month allocation to Japanese fixed income remains a negative 1.2%.

Japanese investors also remained remarkably negative on emerging market equities and fixed income, cutting the two asset classes respectively by 4.5% and 3.5% in the third quarter. This took their 12-month changes to a negative 12.4% and 10.4%, respectively.

Meanwhile, Australian institutional investors were very domestically focused, adding 8.6% net position to fixed interest products, which took their 12-month position to a rise of 8.3%. they also added 9.6% to emerging market fixed income, which took their 12-month position to a positive 17.2% net allocation. Emerging equity was a different story; Australian investors had a net negative 12.6% allocation to the asset class over the year to September.

The investors remain very dubious of US equity and fixed income, however; over the past 12 months they have sold down their average allocations by 10% and 3.5%, respectively.

* The eVestment study was based upon quarter-on-quarter reports from around 2,300 long-only asset managers, who said they had $30 trillion in institutional assets during the third quarter.

Article updated to include emailed comments from Mike Cho.

Laurelli noted across the world US fixed income strategies were among the biggest beneficiaries. He said active US bond managers gained $139.4 billion in net inflows during the third quarter, and passive managers received a further $35.1 billion. US core bond funds were the most popular with global investors, seeing $41 billion of inflows, while corporate strategies gained $27.4 billion.