Alternative Investment Awards 2018

20 New Research Shows 88% Of Institutional Investors Fear Inflation Will Reduce Real Value Of Bond Yields Half of respondents (50%) will increase exposure to higher yielding assets such as asset- backed securities because of concerns. Nearly nine out of 10 institutional investors (88%) have some degree of concern that inflation will erode the real value of bond yields over the next one to two years, according to new research1 by Managing Partners Group (MPG), the international asset management group. Half (50%) of all the respondents say they will increase their exposure to higher-yielding assets such as fixed income asset backed securities (ABS) because of their concerns about rising interest rates. This compares with 37% who said they would do so a year ago2. Latest data shows that annual inflation in the Euro area reached 2.0% in June, which was the highest rate since February 2017 and represented a rise on the 1.9% recorded for May3. In the UK, inflation as measured by the Consumer Price Index was 2.4% in May4. 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 this scenario, fixed income Asset-Backed Securities (ABS) offer an attractive strategy, with yields high enough to counter rising inflation while being secured against real underlying assets, which is reassuring for investors. This flourishing sector also offers a range of yields and risk profiles to suit a wide range of appetites.” The research1 also reveals that three in ten (31%) institutional investors would consider investing in Unitranche Debt, whereby ‘senior’ and ‘junior’ components of the structure offer different yields and risk exposures. On average, respondents in the survey identify the ‘sweet spot’ for the yield on senior debt instruments to be 3.69% and 7.05% for junior instruments. 1 Three in five (60%) of institutional investors expect their exposure to ABS to rise over the next three years. The most attractive quality driving demand growth in Europe is the fact that ABS are secured against realisable underlying assets, which was cited by 38%. Other reasons mentioned include: they are an attractive substitute for unsecured high-yield corporate debt (35%); they meet a range of investor appetites for risk and return by offering both senior and junior tranches of credit exposure backed by the same pool of assets (29%); their market prices are generally stable (19%); and they offer diversification benefits (25%). In terms of factors driving increasing supply, over half (52%) of respondents recognise the role of ABS generally in offering an alternative to lending by banks and 27% say that the European Union would support the ABS sector because it has an important role to play in financing SMEs. Nearly two in five (38%) believe fund managers would use ABS to raise assets under management in their funds, 35% say demand would be driven by an increasing number of lenders looking to issue mortgage-backed securities and 25% point to the strong growth in fintech companies, including alternative lenders that prefer to raise capital via ABS. MPG manages over $500m in a range of alternative and hedge funds. With more than 45 years combined structured finance know-how, it also offers its expertise in arranging securitisation transactions. In 2015, MPG opened an office in Malta to launch a securitization platform for the issuance of ABS by its asset management and third-party buy-side clients. A key factor in this decision was Malta’s Securitisation Act, which established the country as the only European Union jurisdiction outside of Luxembourg with the legislation in place to offer these flexible tools.