Bumper corporate bond allocations drive net inflows
Three large European investors drove higher net inflows into corporate bonds and credit in the second quarter of this year, even as compressed spreads dampened UK pension scheme appetite for investment-grade credit (Reuters/Yann Tessier/File photo)
A smattering of allocations to corporate bonds by European investors saw net inflows more than double in Q2, according to MandateWire data.
Net inflows in the quarter rose to $1.59bn, up from $707.9mn in Q1 and $970.8mn in Q4 2024.
The bumper allocations in Q2 mark a change from the outflows of $1.46bn in Q3 last year.
In Q2, one new credit mandate was awarded alongside a strong set of three asset reweightings, which led to the higher net inflows.
Among these are the University of Cambridge's plans to develop a global corporate bond index to tackle greater fossil fuel use, with $750mn of funds deployed alongside another $750mn from the United Nations Joint Staff Pension Fund to track the index. As part of the index launch, the university announced plans to move up to $265mn of corporate bonds to track the index.
Another large asset reweighting came from the $9.5bn defined benefit part of the Unilever UK Pension Fund. In June, MandateWire reported that the corporate pension scheme was planning to more than double its allocation to corporate bonds, to 21.5 per cent up from 10 per cent.
The scheme is pursuing a de-risking strategy, which has seen the fund lower its growth assets in favour of more liability-matching assets.
Also in June, MandateWire reported that the €4bn ($4.6bn) Stichting Bedrijfstakpensioenfonds voor Vlees, which supports workers of the Dutch meat industry, was winding down allocations to its mortgage portfolio in favour of a greater uptake of corporate bonds last year.
The move comes as the fund continues to ready its portfolio for the new Dutch defined contribution-style pension system, which is set to launch on January 1, 2027.
While interest has picked up among some European asset owners for investment-grade credit, tighter credit spreads have reduced the number of UK-based DB pension schemes making allocations to corporate bonds in recent years, says Matt Tickle, chief investment officer at Barnett Waddingham.
Lower spreads have meant some DB schemes are "reducing the holdings" of company credit and "upping their holdings of cash and gilts", he says, partly explaining the weaker interest in corporate bonds tracked by MandateWire last year.
Tickle explains: "The amount of investment-grade [credit] that they want to buy is probably less than it would have been four or five years ago, because at these spreads investment-grade credits [are] not massively attractive to insurers, so it's not massively appearing in pricing in the same way it would have done [in the past]."
Yet, he adds that DB schemes considering a run on are "happy to have a broader geographic exposure to credit than just UK companies, unlike many insurers who are handling buyout transactions".
When it comes to the University of Cambridge's new climate-tilted bond index, Tickle says investors are "increasingly looking at the role that credit has in meeting their targets, whether it's stewardship, climate targets, [the Sustainable Development Goals], or whatever it might be".
Anthony Odgers, chief financial officer at the University of Cambridge, called the index "a game-changer for the growing number of asset owners who invest in corporate debt and understand its impact on fossil fuel expansion".
Alongside the launch of new environmentally minded corporate bond indices, Tickle says he has seen greater use of environmental, social and governance-based "ratchets", where the coupon value that gets paid back to credit investors can rise or fall depending on whether borrowers hit agreed ESG metrics.
"They're becoming more common in Europe, not in the US. So you're seeing this bifurcation going on in the market," he says.
While the role of equity investing in ESG-friendly companies is "well trodden and understood", Tickle adds that there is now a "greater focus on the bond aspect of the portfolio".