Italy: End of La Dolce Vita for bonds?
“Italians are bond investors like nobody else.” The conclusion was contained in a study carried out by Legg Mason this year. The research revealed that 27% of the average Italian portfolio is allocated to fixed income – which is the highest percentage globally.
Italy’s preference for bonds comes from “historic convictions built up over the years, when bonds were synonymous with low risks and guaranteed returns”, says Marco Negri, country head Italy at Legg Mason.
But markets change and, with the asset purchase program – part of quantitative easing – being implemented by the European Central Bank (ECB), assets traditionally seen as “safe-haven” are starting to yield negatively.
Investors have for some time seen euro area sovereign bonds offering yields below zero on a real basis, while yields on 10-year German Bunds hit negative territory on 14 June for the first time on record – investors being prepared to pay to own German government debt irrespective of inflation.
THE “JAPANISATION” OF EUROPE
The news about the Bund is another stark reminder that investors need to re-think their approach to fixed income as the “Japanisation” of Europe takes hold, reflects Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers.
“Central banks have become dominant players in bonds in order to fulfil their economic objectives. For investors, that is a serious problem. It means taking greater risk for very low returns in a stressed liquidity situation,” Ahmed says.
The ECB’s direct purchases, have also pushed corporate bonds yields in Europe further into negative territory. According to data from Ashmore, some 15% of European corporate bonds offered negative yields by mid-June.
“Negative corporate bond yields are prima facie evidence of bubble valuations in European fixed income markets,” says Jan Dehn, head of Research at Ashmore.
Europe’s low yield is thought to be impacting fund selectors’ demand for these assets.
“Traditionally considered ‘safe-haven’ assets are providing very low or even negative yields thus pushing investors to look for alternative source of returns,” says Filippo Stefanini head of Hedge Funds & Manager Selection at Eurizon Capital SGR.
“That’s why we have recently seen a bigger search for ‘income’ products with low risk and some sort of resilience to stressful market events,” Stefanini says.
While some Italian fund selectors reckon there is more interest in absolute return strategies, Domenico Fazio, director of Family Office at Agenda Invest, says fund selectors’ strategies are focusing on alternative fixed income selection on the back of deeply low or negative yield.
According to data from industry body Assogestioni, Italy’s investment activity in fixed income funds has exhibited erratic behavior.
The Italian market saw net inflows of €360.4m to fixed income funds in Q1 2016, against net inflows of €12bn over the same period a year ago. However, the last quarter of 2015 saw net outflows of €2bn. In April this year, net inflows to fixed income funds reached €1.2bn, which compares with net inflows of €4.5bn year-on-year.QUEST FOR YIELD
As markets continue to experience bouts of volatility and yields decline, Italian investors are looking for attractive strategies that offer juicier yields.
“At the moment I think that strategies investing in cross asset liquid premia will gain popularity over the next few years. At the moment they are dedicated to institutional investors,” Fazio says.
But still, Italians’ preference for bonds is set to continue.
“Italian investors are mainly bond investors. They search for yield and they have a preference for income products and short term aggregate funds,” Stefanini says.
Asset manager TCW, for its part, says Italian investors’ demand for fixed income products has not diminished, but increased, particularly for US fixed income portfolios.
“Although multi-asset portfolios remain a focus for many investors, over the last quarter we have seen growing interest in bond funds,” says Gian Luca Giurlani, managing director of TCW Europe.
