Rotation to equities unlikely, says Pioneer’s Sandro Pierri
Pioneer Investments CEO Sandro Pierri feels that the shift to fixed income seen in recent years is set to remain in place as Europe’s investors react to demographic and regulatory pressures.
Investment commentary has been alive with warnings of a Great Rotation out of bonds into equities but despite persistent speculation, the big swing has never quite happened.
Pioneer Investments CEO Sandro Pierri (pictured) attributes the resilience to the unfolding of long term demographic trends, set to be a major influence on investment structures and themes for many years to come.
In many developed and some emerging economies where there are ageing populations, risk-averse investors are retaining a high concentration of their assets in fixed income, creating a real challenge for the investment industry.
Pierri stepped up to the top post at Pioneer, the asset management arm of UniCredit, in July 2012, moving from his previous role as head of Western Europe and International to take over from Roger Yates. A strategic review of the firm’s activities, started in 2010, resulted in a fresh business plan, which was publicised in January 2012.
It concluded that organic growth, rather than acquisition, (or, as some feared, disposal) was the way forward for the firm. Although retail and private banking clients still account for 45% of the client base, Pioneer is rapidly growing its wholesale (now 30%) and institutional (25%) books. The Institutional channel contributed 70% of the new business won in 2013 net sales year-to-date.
Pierri has steadily extended hiring for core investment capabilities, boosting asset flows, and streamlining operational functions by outsourcing. With total assets under management of some €170bn (at end May 2013), fixed income is now a key expertise, with its emerging market bond and equity teams brought together at a London base.
“What we are seeing is a convergence of demographic trends and this persistent high allocation to fixed income for those in the age bracket 55 to 75,” says Pierri. “Additionally there are factors like the provisions of EU Solvency II directive, amongst other pieces of legislation, which make it difficult to allocate away from fixed income.”
The growing emphasis on institutional business fits with Europe’s demographic outlook, drawing together the worlds of wholesale and institutional investing, evident in the institutionalization of wholesale platforms.
An industry desperately in search of yield is convincing itself that a “great rotation” into equities is about to happen, and that investors will change their mindset, Pierri notes. “But they are not going to, so the big question for me is how to change the way the investment management industry manages fixed income, because it’s here to stay.”
By asset class, Pioneer now has 61.5% of AUM invested in fixed income, with just 19% in equities, 17.1% in multi-asset mandates, 0.8% in money market funds and 0.5% in alternatives.
Yearly returns from fixed income were strong over the last 10 years. But, stripping out the duration contribution (ie, reduction of interest rates), returns for aggregate indices are in the range of 50 basis points. This is what investors can expect for the future, according to Pierri’s view on future monetary policy.
Pioneer’s response is to design innovative investment structures which Pierri calls “Fixed Income 2.0” built around a search for uncorrelated alpha, combined with an overhauled risk framework or risk budget.
“This suggests a benchmark agnostic fixed income product,” he explains. “It is a huge challenge and a huge opportunity as well. We have been moving towards it for the last few years. For example, our absolute return bond fund designed along these lines, has done very well during the recent market correction”