Institutional Investors

Analyzing Institutional Investor Sentiment Around Rising Interest Rates

Institutional investors are facing the task of navigating global central bank policy shifts and their effects. In U.S. markets, this has resulted in a flattening yield curve and heightened awareness and anticipation of a U.S. rising rate environment. Using eVestment’s Public Plan IQ, Advantage and Asset Flows solutions, we analyzed the actions that U.S. public plans are taking to mitigate the downside risk from shifting and rising rates.

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Interest Rates

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Following three rate hikes in 2017, the first two of four projected rate hikes expected for 2018 have already occurred. Although the Fed’s actions signal confidence in the economy, institutional investors will have to manage their portfolios’ interest rate and inflation sensitivity.

eVestment’s new whitepaper, “Navigating Fixed Income Portfolios in a U.S. Rising Rate Environment,” combines qualitative commentary from investment consultants with quantitative data from eVestment to discuss the current environment, institutional investors’ reactions, fixed income manager searches, and the future. The consultant commentary reviewed in this paper include Aon, Callan, NEPC, PCA, RVK, and Verus.

Some common themes in the actions taken by institutional investors are allocating more towards inflation protection strategies, searching for yield in other regions such as Emerging Markets and reviewing favorable duration.

Emerging markets fixed income – local currency has had a mix of positive and negative flows over the last year. U.S. consultant views of emerging markets fixed income – local currency strategies picked up as a portion of all U.S. consultant-viewed fixed income products between Q4 2017 and Q1 2018. Additionally, eVestment is now tracking manager searches sourced from the documents added to the Public Plan IQ database. As of mid-May 2018, there have been six announced fixed income searches, and five of those six were for Global or Global Emerging Markets strategies.

Looking forward, U.S. public funds continue to combat the rising rate environment. While some investors have approved initial allocations to fixed income strategies like U.S. TIPS or U.S. intermediate government, others have chosen to adjust the allocation weights of their current strategies or transition the currency denomination of their investments. On average, these investors still have room for positive flows to fixed income relative to the average target allocation.

Article by Morgan Steadwell, eVestment


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