Institutional investors are increasingly allocating their fixed-income portfolios towards index and alternative strategies to help mitigate market volatility, according to new research.

A survey by State Street Global Advisors (SSGA) found many are now adding private credit investments to their public fixed-income approach. 

The Future of Fixed Income report also highlights a growing move towards systematic fixed-income strategies and inflation-linked bonds to combat the impact of rising costs.

The findings are based on responses from 700 pension funds, endowments, foundations, sovereign wealth funds, along with wealth and asset managers.

Over a third said more than a fifth of their fixed income portfolio is now allocated to index strategies, while the biggest investors are allocating well over a half.  

Nearly a third of those surveyed cut back their traditional fixed income allocations in favour of alternatives over the last nine months, and a further third plan to do so in the coming year.

Almost half of respondents say they face increasing pressure to make more efficient use of fees in fixed income.

Gaurav Mallik, SSGA’s chief investment strategist, said: “Our research confirms that with the dramatic rise in yields, investors are concerned about how to balance risk and return within their portfolios, leading them to look beyond traditional public fixed income investments.

“Now is the time for institutional investors to be strategic with their allocations, and they are finding increased opportunity to pair private assets with liquid publicly traded exposures.”

The report’s findings also suggest ESG has now overtaken a focus on managing the effects of inflation and rising rates as the top priority for investors.

More than a third said ESG considerations are crucial to their fixed income allocations over the next 12 months.

Nearly half of investors have already integrated ESG factors within high-yield corporate credit, investment-grade credit, and emerging market debt.

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