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Opportunities in alternative fixed income

Opportunities in alternative fixed income
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ARTICLE TYPE
Research
TOPIC
Solutions,Alternative fixed income
PUBLISHED
August 18,2023
READ TIME
15 mins
AUTHOR
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Back
ARTICLE TYPE Research
TOPIC Solutions,Alternative fixed income
PUBLISHED August 18,2023
READ TIME 15 mins read
SHARE

Alternative fixed income assets, have become increasingly important for institutional investors. They provide opportunities to increase the overall portfolio yield when the (often lower) liquidity of these assets is less of a constraint. This is typically the case for long-term investors, such as pension funds or life insurance companies.


Comparison

In Table 1 we compare different categories within the alternative fixed income spectrum. It is important to note, however, that the scores on the different dimensions can (and will) shift over time and that the assessment is sometimes based on qualitive instead of quantitative measures (the ESG assessment being an example). Capital charges are determined with the standard formula of the Solvency II regulations.

 


Table 1: Comparing different alternative fixed income strategies

Alt-comparison.jpg

Table 1: Characteristics of a variety of fixed income asset classes (for illustrative purposes only). Indicative spreads in . Actual spreads are reported for strategies which are available via a well-diversified fund format. For more bespoke strategies a spread range is given. Rating indications in this table are either external ratings (when available) or internal ratings (for unrated instruments). We here consider the matching properties for an investor with long-term liabilities. For details on how the strategies can have an ESG angle, get in touch with us. Sources: Bloomberg, Aegon Asset Management, La Banque Postale Asset Management, as at June 30, 2023 or latest available.

 


In the full paper, the different characteristics of each asset class in Table 1 are discussed in more detail.

 

Conclusions

  • In recent years alternative fixed income assets such as mortgage loans, infrastructure financing and private debt have become much more important categories for institutional investors. They can provide opportunities to increase portfolio yield when the (often lower) liquidity of these assets is not a constraint. This is typically the case for long-term investors, such as pension funds and life insurance companies.

  • Many insurance investors will already be aware of the benefits of Dutch mortgages, which can provide an attractive return on capital. Other types of alternative fixed income can add diversification alongside mortgages, but also alongside public market investments. Higher yields are possible (even with well-collateralized senior loans), particularly in private corporate debt markets.

  • In practice, an alternative fixed income allocation can offer exposure to a wide variety of return drivers, many of which also have an ESG focus. Examples discussed in this article include insured loans, SME loans and infrastructure debt. An interesting feature of these categories is that greater safety measures can exist compared to traditional corporate loans, for example in the form of additional covenants or guarantees. Dutch SME loans can, for example, benefit from additional protection by the European Investment Fund, while private debt can benefit from additional protection by an insurance company.

  • Alternative fixed income strategies demonstrate great variety, both in terms of spread, risk, capital charge, liquidity, duration matching and ESG factors. Investors have an opportunity to select those assets which best fit their particular investment needs, by taking the different characteristics of these assets into account.

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