Active management in fixed income
"We will see a significant shift from long-term holding of bonds towards active management of fixed income assets to protect investor's money", describes Sandro Pierry, CEO of Pioneer Investments the implications of a changing interest rate environment on fixed income asset management. "We expect 'next generation fixed income' or 'fixed income 2.0' in the future", he adds at a presentation in Vienna ahead of Pioneer Investments' Colloquia Series in Vienna.
Pioneer Investments: Strong inflows into fixed income asset classes this year
Around 70 percent of retail assets are invested in fixed income today and many investors are approaching retirement age. This will not lead to a shift to equity. Regulation also forces institutional investors to stay invested in fixed income. "We raised about EUR 8 bn in assets globally this year. Half of that volume from institutional investors and half of it from retail investors. 70 percent of these assets are invested in fixed income and even the difficult 3rd quarter was strong", explained Pierri.
The majority of the firm's assets of EUR 169 bn are mutual funds (64 percent) and the regional breakdown shows that 67 percent of assets come from European clients, followed by 21 percent from the U.S., 10 percent from Austria/CEE and only 2 percent from Asia.
The Austrian/CEE business is run by Werner Kraetschmer and contributed EUR 1 bn to the EUR 8 bn overall flow so far this year.
Asian markets in focus
Pierri points out that Taiwan is an important market for Pioneer and that the company ranks as 7th largest manager in Taiwan today. Hong Kong and Singapore are also interesting markets. Mutual recognition of different domiciles within the region as well as developments around Asian fund passports will be monitored closely over the next few years.
Market outlook generally positive
Giordano Lombardo, Deputy CEO and Group CIO of Pioneer Investments sees three possible scenarios:
(1) Reaccelerating Growth ("Goldilocks") where Equity and Credit products would do well and bonds would suffer.
(2) At par Growth with rising interest rates in 5-10 years which would be neutral for bonds and equities but bad for cash, and
(3) Central bank tightening followed by new recession ("Out of control") which should be positive for gold an real assets and negative for bonds.
The probabilities for the three scenarios are as follows: 60 percent, 30 percent and 10 percent. Equity and credit are seen as overbought and therefore buying protection is a sensible strategy, explains Lombardo.
Deflation risk exists
Lombardo also commented on the "rather surprising" interest rate cut by the ECB last week which could help to revive the economies in Southern Europe, explains Lombardo who also sees a risk of deflation at this low inflation rates due to possible measurement errors.
Monitoring central bank policies are important these days. Whereas the FED balance sheet expanded to USD 4 trillion and will expand by another USD 1 bn per year, the ECB balance sheet started to shrink already due to a reversal of the LTRO money. If the FED would target the price level of financial assets in the past and not the unemployment rate, they would have raised interest rates by now.
Lombardo sees also a problem in connection with a fragmentation of credit markets in Europe where banks have to focus on local business - funding as well as lending.
