Almost 90% of institutional investors concerned about inflation

A large majority of institutional investors globally – 88% – have concerns that inflation will erode the real value of bond yields over the next one to two years, according to Managing Partners Group (MPG).

MPG found that half of investors said they would increase their exposure to higher-yielding assets, such as fixed income asset-backed securities (ABS) because of concerns about rising interest rates. This figure was up from 37% a year earlier. Inflation in the euro area reached 2% in June and 2.4% in the UK in May. Jeremy Leach, chief executive officer at MPG, commented: “Inflation is creeping back into western economies and institutional investors will have to adjust their bond and equity portfolios to deal with the headwinds created by monetary policy normalisation and rising interest rates.

In other findings, 31% of investors said that they would consider investing in unitranche debt, where senior and junior components of the structure offer different yields and risk exposures. And 60% of institutional investors said their exposure to ABS will rise over the next three years. Investors cited the fact that ABS instruments are secured against realisable underlying assets as their most attractive quality, followed by the fact that they make a good substitute for unsecured high-yield debt and can meet a range of investor appetites for risk and return through senior and junior tranches from the same risk pool. In terms of factors driving increasing supply, over half (52%) of respondents acknowledged the role of ABS generally in offering an alternative to lending by banks, while 27% said that the European Union would support the ABS sector because it has an important role to play in financing SMEs.