Some 40% of advisers expect emerging market debt to offer the best fixed income returns over the coming year, according to a survey of 242 advisers by Axa Investment Managers. Only 2% recommend gilts.
Although the Treasury recently authorised a new round of quantitative easing from the Bank of England, and a second round of quantitative easing in America looks likely, advisers have moved away from gilts, pointing to inflation and downgrades as a potential difficulty for the asset class.
Half of advisers said investment-grade corporate bonds would offer better medium-term value than gilts, while 32% said they would recommend them in the next 12 months. (article continues below)
However, 46% of advisers added that inflation, which erodes the value of most investment-grade instruments, was a worry for clients’ portfolios, leading them to consider inflation-linked debt.
Partly as a result, advisers preferred assets that were relatively unaffected by British inflation, such as emerging market debt, which 23% said they plan to recommend in the next 12 months.
Some 29% of advisers also said high-yield bonds would provide the best returns, with 19% planning to recommend them.
Because of its higher interest payments and real returns, high-yield debt is usually less affected by rises in inflation and interest rates.
Despite advisers’ enthusiasm for more esoteric areas such as emerging market debt, however, many vehicles designed to meet advisers’ complete fixed-income needs do not invest in the asset class.
Tony Yousefian, the chief investment officer at OPM Fund Management, points out that many funds in the £ Strategic Bond sector, whose investments can range widely across the asset class, do not invest in emerging market debt.
He says he has had to take individual positions in emerging market debt funds within his multi-asset range without relying on his strategic bond fund holdings for exposure.
Yousefian has also moved money out of gilts and investment grade bonds and into high-yield debt and emerging markets over the past year. He has invested in a specialist Asian fund with substantial corporate bond exposure as well as a more generalist emerging market debtfund with a spread of local currency and dollar-based instruments.