Institutional Investors Inflation Fears

March, 2017

Virtually all (98%) institutional investors globally have some degree of concern that inflation will reduce the real value of bond yields over the next 12 to 24 months, new research(1) by Managing Partners Group (MPG), the international asset management group, has revealed.

In order to address these concerns, just over a third (37%) say they will increase their exposure to higher yielding assets such as fixed asset backed securities (ABSs), the research shows. Of those who plan to increase their exposure to fixed income ABSs, 58% say they will do so because of the high level of income they generate; 53% say it is because the vehicles are attractive on a risk-return basis; and 41% cite diversification benefits.

Latest data shows inflation rising across Europe. The UK’s Consumer Price Index (CPI) rose to 2.3% in February versus 1.8% in January,(2) while in the Eurozone, CPI reached 1.8% in January, which was its highest in four years and up from 1.1% in December.(3)

Findings from the research(1) were due to be announced today at The Malta Solution – Ahead of the Curve seminar in London.

The research(1) also shows that 37% of institutional investors anticipate that fund managers will increasingly issue fixed income ABSs to raise their own assets under management, versus just 11% who disagree with this. The primary reason for this expectation, given by 47%, was that ABS issuance allows fund managers to raise money under different regulatory regimes. Other reasons given included that it is much easier to raise money through ABSs rather than market funds in a highly competitive market (41%); they give the ability to target different sectors of the investment community (29%); and because monies raised are held for fixed terms, this means that investments can be planned more effectively (29%) and liquidity managed more easily (18%).

MPG opened an office in Malta in 2015 to launch a securitisation platform for the issuance of asset-backed securities by its asset management and third party buy-side clients. A key factor in this decision was Malta’s Securitisation Act, which established the country as the only European Union jurisdiction outside of Luxembourg with the legislation in place to offer these flexible tools.

Jeremy Leach, Chief Executive Officer at MPG, commented: “The securities market, and fixed income asset back securities in particular, are set for substantial growth in Europe in the next few years. Fixed income ABSs provide the higher yields needed to tackle inflation while being secured against real underlying assets, which investors find reassuring. Governments are also putting legislation in place to promote them because of the role they play as an alternative source of finance to banks, which is particularly helpful for SMEs.

“MPG’s capital markets team has identified particular opportunities for mid-sized issues backed by SMEs and esoteric assets and there is significant interest from businesses in the burgeoning fintech sector looking to fund themselves beyond the traditional bank market.”

“We will also see fund managers increasingly use them as a straightforward means of raising assets under management that are ‘stickier’ and therefore help them manage their investment strategies and liquidity much more easily.”