Home Market Bias on the Wane

Search for Yield Fueling Interest in Emerging Market Debt Strategies

SMITHFIELD, R.I. & HONG KONG -- (BUSINESS WIRE) --

Forty-three percent of institutional investors worldwide will likely increase exposure to global bond strategies in the coming years, according to a Pyramis Global Advisors® survey of pension schemes and other institutions from Europe, Asia and North America. These respondents oversee more than USD$5 trillion in assets.

Yields in many developed markets are extremely low, causing institutional investors from Europe to Asia to look beyond their home markets for fixed-income strategies that can deliver higher yields. In Europe, 38% of investors surveyed said they will likely increase allocations to non-domestic fixed-income strategies. The trend is even more pronounced in Asia, with 54% of investors indicating plans to increase exposure to non-domestic fixed-income strategies.

"With historically low yields in many safe haven bond markets and increased credit risk in a number of European countries, it is not surprising that many institutional investors are beginning to look beyond their borders," said Charlie Morrison, president of Fixed Income.

Growing Demand for Emerging Market Debt

Globally, 24% of investors surveyed said they will increase allocations to emerging market debt (EMD) over the next few years.

• 37% of Asian institutional investors plan to increase allocations to hard currency EMD while 33% will likely increase exposure to local currency EMD

• 47% of European institutional investors plan to increase allocations to local currency EMD, while 36% will likely increase exposure to hard currency EMD
• 11% of U.S. institutional investors plan to increase allocations to local currency EMD while 13% will likely increase exposure to hard currency EMD
• 15% of Canadian investors will likely increase exposure to EMD.

"The trends for emerging market debt remain positive," said Tom Hense, chief investment officer of the High Income division. "Attractive yields and improving credit fundamentals are fueling investor demand in these markets."

Currency and Derivatives Policies Evolving

The 2012 survey also indicated changing attitudes toward currency hedging. Traditionally seen as a way to hedge risk, currency hedging is now seen by many investors as a potential source of alpha as well. This trend is most apparent in Asia, where 47%of investors surveyed view currency as both an added risk to the portfolio and a potential source of alpha. This view was also held by 30% of the investors surveyed in Europe, followed by 24% of the respondents in Canada and 21% of the survey participants in the U.S.

The use of derivatives, which fell out of favor after the financial crisis in 2008, is once again on the rise. Sixty-four percent of all investors surveyed allow their managers to use derivatives. Of those surveyed, 47% use derivatives for downside protection, 43% use them to tactically adjust beta exposure and 42% use them to lengthen duration.

About the survey

Pyramis Global Advisors conducted a survey of institutional investors during June and July 2012, including 632 investors in 16 countries (193 U.S. corporate pension plans, 109 U.S. government pension plans, 92 Canadian pension plans, 149 European and 89 Asian institutions, including pensions, insurance companies and financial institutions). Assets under management represented by respondents totaled more than $5 trillion USD. The surveys were executed in association with Asset International, Inc., in the U.S., the Canadian Institutional Investment Network in Canada, and the Financial Times in Europe and Asia. Institutional executives responded to an online questionnaire or telephone inquiry. A report on the survey is available at www.pyramis.com.

About Pyramis Global Advisors

Pyramis Global Advisors, a Fidelity Investments company, delivers asset management products and services designed to meet the needs of institutional investors around the world. Pyramis is a multi-asset class manager with extensive experience managing investments for, and serving the needs of, some of the world's largest corporate and public defined benefit and defined contribution plans, endowments and foundations, insurance companies, and financial institutions. The firm offers traditional long-only and alternative equity, as well as fixed income and real estate debt and REIT investment strategies. As of September 30, 2012, assets under management totaled more than $190 billion USD. Headquartered in Smithfield, RI, USA, Pyramis offices are located in Boston, Toronto, Montreal, London and Hong Kong.

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Investors Who View Currency as Both an Added Risk and a Potential Source of Alpha in a Portfolio (Graphic: Business Wire)

Investors Planning to Increase Exposure to Emerging Market Debt in the Next 1-2 Years (Graphic: Business Wire)