Shrinking investment returns in equity markets have forced investors to spend more time and energy putting together investment strategies to get the most out of their fixed income portfolios. The need for improving diversification while keeping risk under control has resulted in investors wanting to gain exposure to different asset classes within the fixed income universe in order to try and match long-term liabilities.
This renewed interest in bonds is resulting in many mandates being awarded to external fixed income managers.
According to data from FT Mandate Research, 41 pure fixed income mandates were awarded during the 12 months to the end of May, totalling just under €11bn in assets. This does not include the fixed income part of any balanced mandates awarded during the period.
Top of the list of fixed income managers in terms of new assets won through new mandates during this period is Northern Trust Global Investments. The company secured over €2.6bn of new assets, most of which came from the Shriners Hospital for Children in Florida. The hospital appointed Northern Trust to managed fixed income mandates benchmarked against the S&P500 and the Lehman Brothers Aggregate Bond indices.
On a much smaller scale, Northern Trust was also awarded a €12m mandate by another US health sector organisation. In this case the St John’s Health Center Foundation in California chose the firm to manage its balance sheet assets in cash and fixed income.
The second position in terms of total size of fixed income mandates awarded is F&C Management receiving a total of just under €1.7bn of assets split into three different mandates. The largest, representing €1.68bn, came from Swiss Life UK which selected F&C to manage its with-profits insurance policy assets mainly investing in fixed income instruments. In this case the manager was chosen to replace King & Shaxon Asset Management, the previous mandate holder.
This was not the only manager replacement revealed by our research. According to our data, 11 out of the 41 fixed income mandates awarded involved the replacement of managers whose contracts were terminated for one reason or another. Topping this “replaced manager list” is Deutsche and Merrill Lynch, both losing three mandates.
Losing out
Other fixed income managers that were substituted by competitors include Legal & General, Henderson, ING and Robeco. On the other hand, the manager that was appointed in more occasions was Baring Asset Management which won five of the mandates in our list.
Although this list of mandates is not representative of the industry as a whole, by examining the different appointments it is possible to establish some common patterns among investors in search of bond managers. First, investors are looking outside the government bonds arena and moving into corporate and high yield bonds. In terms of geographical exposure, because most of the mandates recorded came from European investors, European mandates represent half of the total awards. Global fixed income remains popular too with the largest award coming from the Surrey County Council Pension Plan. This UK scheme chose Western Asset Management to invest €227m of its assets in global fixed income instruments.
Moving to a different region investors also considered investments in the US bond market awarding seven mandates to invest in North America, with Northern Trust winning three of these briefs.
As European investors tend to invest in European bonds, so too do investors in Asia diversify their fixed income exposure across different countries in the region. Executives’s Meeting of East Asia and Pacific Central Banks, for instance, chose State Street Global Advisors to manage the €880m assets of the ABF Pan Asia Bond Index fund (PAIF). The fund invests in domestic fixed income instruments in countries such as China, Indonesia, Phillipines and Singapore. These investments are benchmarked to the iBoxx ABF Pan Asia index.
In general our list of mandates provides a good sample of how fixed income is evolving into a more diversified and rich asset class that can satisfy many of the specific needs of investors across the world.
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