As assets continue to migrate to bond funds, the question is with interest rates so low, how long will this trend last?
Jag Alexeyev, senior managing director and head of global research for New York-based Strategic Insight, says that US investors will likely begin to follow in the footsteps of their European counterparts and look to high yield and emerging debt funds.
U.S. bond fund investors have been more reliant on traditional bond strategies and invested in government bonds and corporates, but “clearly going forward if rates stay as low as they are now on treasuries and if they go lower, we’ll likely see same trend as Europe,” he said.
High yield, emerging and global debt funds are capturing two-thirds of bond fund inflows in Europe and account for 37% of bond fund assets in Europe compared to 20% in 2004, according to Strategic Insight.
Another international trend that will likely be seen more in the U.S. is interest in alternative strategies, long/short market neutral strategies, tactical asset allocation and flexible/mixed asset strategies, Alexeyev said. These strategies can be seen across asset classes and are trickling into the bond fund space, he said
“You’ve seen the adoption of some unconstrained bond fund strategies in the US,” he said. “The U.S. has always been behind the curve compared to Europe on the adoption of alternative strategies but they’ve caught up in certain asset classes, not so much in bonds. If you look at what is going on in Europe, we suspect, if it remains a low interest rate environment then, there is that question of how do we get income and protect capital in the rising rate environment?"
There is a "feeling in the asset management industry that a flexible strategy could help to navigate a different environment and sudden adjustments. Investors are also seeing the potential benefit of those types of strategies across the board but in bond funds as well. You’re seeing a little bit of it in the US and we suspect will become more important in the future,” Alexeyev said.
Another trend is the attraction of international asset managers to Europe, as fund sales there boom and as the region’s banks rethink the role of their in-house fund units, Alexeyev said. As some banks exit the space, that provides more room for third-party managers, he said.
