Institutional Investors Shift to Higher Yielding Assets to Meet Income Objective, finds Fidelity Survey

-          65% of Asian institutional investors’ income yield declined in the past five years

-          Institutions emphasis on regular investment income relative to capital appreciation

-          Investors favour investment-grade bonds and high-dividend equities which are perceived to offer better trade-off between income and risk

 

HONG KONG, 9 August 2012 – Asian institutional investors are turning to a greater range of assets offering a higher yield as returns from traditional income-generating investments such as cash and government bonds have fallen to historic lows, an independent survey carried out for Fidelity Worldwide Investment has found.

 

The survey finds 65% of Asian institutional investors reported a decline in income yield in the past five years and about half of all institutional investors across segments and geographies have experienced a shortfall relative to required investment income.

 

“A rolling financial crisis, economic dislocation and consequent market volatility have reduced institutional investor confidence in the likelihood they will benefit from capital appreciation,” according to Chris McNickle, Global Head of Institutional Business at Fidelity Worldwide Investment.  “This has increased the importance of income, but it comes at a time of historic low interest rates and a sharp rise in the perception of the risks involved in certain investments traditionally associated with income generation.  So investors are searching for income in other places—within asset classes and across them,” he continued.

 

Asian investors are forecast to make more active changes to increase investment income over the next five years with many planning to turn to high-dividend equities and investment-grade bonds as they provide the most favourable trade-off between income and risk, the Fidelity’s Age of Income report highlights.

 

Asian institutions showed a concurrent willingness to gradually shift sources of income up the traditional risk spectrum. 56% of them are expected to increase their exposure to European and US investment-grade bonds in the next five years. Over four in ten (44%) of Asian respondents plan to raise their asset allocation to emerging market investment-grade bonds, with a similar proportion planning to increase exposure to equities with high dividend yields. 

 

The report highlights the sustainability of dividends is key and dividend-paying stocks can represent a sensible diversification for income-focused investors. The extra returns from dividends can provide a valuable margin of safety against price declines if volatility continues. Dividends also provide an income stream that grows in real terms and broadly protects against inflation. The report also suggests that there are many opportunities for investors to find attractive income by focusing on high-quality issuers or by taking a flexible approach to bond investing that avoids the concentration risk in aggregate benchmarks. Countries with sound fiscal management, such as Canada and Australia, and companies with strong free cash flow are perceived as better bets than many traditional sources of income. Property investments also provide a source of stable income among investors who can sacrifice short-term liquidity. Yields on properties with long-term leases held by tenants who are good credit risks can generate income in excess of more liquid sources—a positive trade-off for long-term investors.

 

Managing the risks inherent in the various sources of income all require in depth research and analysis—to ensure income streams are sustainable and credit quality sound. Almost half of institutions surveyed believe low interest rates will be the key driver of shortfalls in income over the next five years. Other factors sighted by respondents include credit spreads and dividend yields. When it comes to the sources of risk to principal, Asian institutions are most wary of equity market risk, 44%, followed by interest rate risk at 41% and credit/sovereign risk at 37% respectively.

 

Institutions are managing the risk through diversification as well, which also allows for a dynamic approach to asset allocation to protect assets and grow them through periods of unusual turbulence. Diversification offers an attractive route to achieving the investment objective of stable and sustainable yield within a managed risk framework.  By blending different asset classes, a dynamic multi-asset approach can deliver lower variability of yield and capital, and diversify sources of risk. Risk-parity portfolios are an interesting example and provide one elegant solution to this trade-off.

 

Mark Talbot, Managing Director Asia ex Japan at Fidelity Worldwide Investment, said, “The search for income is already a powerful investment theme but it is one that we expect to grow in importance over the next decade. Investors are reassessing their strategies as it becomes clear the world economy is in the midst of a fundamental restructuring. Secular growth drivers are reshaping the balance of economic power; the demographics of longevity and aging populations are intensifying the retirement saving imperative; while the financial risk environment has been transformed by the 2008 credit crisis and the ongoing sovereign debt crisis.

 

“The growing importance of income is confirmed in our survey of institutional investors. Not only is income expected to be a more important driver of returns, going forward, we see clear evidence that institutions are considering a wider range of assets to meet their income needs. In this environment, flexible fixed income portfolios, quality-focused equity dividend portfolios and commercial real estate portfolios can offer greater yields without necessarily taking on significantly higher risk. For investors looking for an attractive compromise between stable yield and managed volatility without the concentrated risks to capital reliance on a single asset class entails, a risk aware multi-asset approach can offer a compelling solution.”

 

-          Ends –

 

Notes to editors:

 

Greenwich Associates interviewed 27 and 25 major institutional investors in Asia and Europe respectively in June 2012. Institutions surveyed included leading insurance companies, blue chip corporate and local authority pension funds, including both defined benefit and defined contribution schemes. The full results of the survey can be found in the Fidelity White Paper: “The Age of Income: the growing importance of income investing in turbulent times.”

 

Fidelity Worldwide Investment is a global leader in asset management, providing investment products and services to individuals and institutions in the UK, continental Europe, the Middle East and Asia Pacific. Established in 1969, the company has over 5,000 staff in 24 countries and manages or administers client assets of US$270.5bn. It has over 7 million customer holdings and manages more than 720 equity, fixed income, property and asset allocation funds. The company’s fund managers receive research from one of the largest proprietary research teams, based in 12 countries around the world. Fidelity Worldwide Investment is an independent asset management company which is privately owned.

 

Data as at 30 June 2012

 

Media Contact:

Rowena Kwok 

Kate Cheung 

Head of Corporate Communications, Hong Kong

Manager, Corporate Communications

Tel: +852 2629 2782

Tel: +852 2629 2641

Email: rowena.kwok@fil.com

Email: kate.cheung@fil.com