The worldwide hunt for yield faced with persistently low returns on developed market sovereign debt, institutional investors have been scrambling around to find alternative sources of income. Last year saw a return to fixed income investing in a big way from Asian investors. Having pulled more than $200 billion pounds from the asset class in 2015, Asian institutions became net investors once again. Meanwhile their peers in Europe and North America continue to make allocations to fixed income, albeit in smaller doses than in 2015. But what alternative forms of fixed income were they most attracted to?
In Asia, institutional investors that had withdrawn from emerging market bonds in droves in 2015, made a modest return to the asset class. Elsewhere, investors from Australia, Japan, and the Philippines invested in loans, while investors from China and South Korea showed the greatest appetite for private debt funds which lend to nonpublic companies. For European investors, private debt and mortgages proved especially alluring. Dutch pension plans, which have been at the vanguard of shadow banking, accounted for the vast majority of mortgage investments in 2016. A handful of Swiss funds also made sizable commitments.
More than half the investments in private debt last year were made by UK pension funds, taking advantage of lower lending from banks. European investors turned their back on corporate bonds and loans in 2016, having made modest commitments in 2015. Private debt was also a big hit with North American institutional investors, with $12 billion flowing into the asset class.
Again, it was pension funds that accounted for most of the allocations. But several endowments also increased their exposure to private debt. Pension funds tended to be awarding private debt mandates for the first time, while endowments, which are often early adopters of new asset classes, were more often increasing commitments that they had already made. The worldwide hunt for yield continues.