A high-inflation environment is pushing Canadian pension plan sponsors toward alternative sources of fixed income, according to a white paper released by Coalition Greenwich.
The white paper, which was commissioned by Toronto-based AGF Investments, is based on telephone interviews with 31 Canadian corporate and public sector pension plan sponsors and endowment fund managers. It found respondents are attracted to alternatives due to their higher yield expectations with strategies that emphasize private credit and emerging market debt the most popular.
When asked to choose what they considered the best high-yield fixed income approach, a majority of respondents said they favoured core-plus strategies that invest in a mix of government and investment-grade corporate bonds complemented by smaller allocations to high-yield, global and emerging market debt. Fewer than half (42 per cent) said they favour strategies using allocations to private credit.
The white paper noted Canadian institutional investors believe fixed income plays a vital role in portfolios and helps to manage volatility and preserve capital, while also generating more stable returns than equities. However, in the low interest rate environment facing institutional investors, they’re placing a larger emphasis on the need to generate higher returns.
“But asset owners also recognize that their fixed income portfolios must evolve to be fully worthwhile and meet the changing [environmental, social and governance] requirements of their stakeholders,” wrote the white paper’s authors. “In today’s low interest rate environment, more emphasis than ever is being placed on higher-yielding assets like private credit and strategies that can allocate beyond government and investment-grade corporate bonds towards high-yield and emerging market debt.”