Canadian Investors' Shifting Fixed Income Preferences: Income, ESG, and Higher Yields, Slides of Investment Theory

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Evolving Investor Preferences for

Fixed Income Investments

Executive Summary

Canadian institutional investors remain deeply committed to having fixed income assets in their portfolios,

but their exposure to government and investment-grade corporate bonds continues to wane in comparison

to less traditional sources of yield that offer the potential of higher returns like private credit and Emerging

Market (EM) debt.

Although asset owners – from public and corporate pension plans to endowments and foundations – believe

the primary goals of fixed income are to preserve capital and manage volatility in a diversified portfolio that

includes equities, they also cite income generation as a growing priority in a low-interest rate environment

that is not expected to change, even as central banks tighten monetary policy in the short term.

The same institutions also agree that allocations to higher-yielding fixed income must be weighed carefully

given the potential peril of investing in them. For some, liquidity is the most critical factor in determining

the appropriate mix of private versus public investments, while others seem more concerned with how to

manage credit, duration and/or geographic risks that may be associated with their portfolios.

Beyond these considerations, asset owners recognize the importance of incorporating environmental, social

and governance (ESG) criteria into their investment processes and portfolios, but it’s still “early innings” on

this front when it comes to their fixed income holdings, and many say future adoption will be slow.

Granted, how much progress is made going forward may largely depend on the advice and

recommendations of investment consultants, for whom asset owners overwhelmingly rely on to fill a new

fixed income mandate. Even so, what seems to matter most to Canada’s pension plans, endowments and

foundations is the experience, stability and track record of the investment team(s) employed to manage

their fixed income portfolios.

Methodology

Coalition Greenwich conducted 31 telephone interviews targeting corporate pensions, public pensions,

and endowments and foundations based in Canada to examine investors’ evolving sentiment toward fixed

income investments and current thinking about portfolio implementation. The interviews took place during

February and March of 2022. The study that this report is based on was commissioned by AGF Investments

and conducted by Coalition Greenwich, a division of CRISIL.

Respondents

Corporate Pensions Endowments & Foundations Public Pensions

51.6%

19.4%

29.0%

Note: Based on 31 respondents Source: Coalition Greenwich 2022 Fixed Income Investing Study, March 25, 2022

Objectives Driving Fixed Income Allocation

ESG Goals

ExpectationsInlationary

RequirementsRegulatory

RequirementsSolvency

Liquidity Concerns

Interest RateProjections

Return Objectives

RebalancingPortfolio

Liability Matching

Risk Objectives

Ranked #1 Ranked #2 Ranked #

Corporates Publics E&Fs

Note: Based on 31 respondents Source: Coalition Greenwich 2022 Fixed Income Investing Study, March 25, 2022

The Search for Higher Yield

Asset owners recognize a need to diversify their fixed income portfolios beyond government and

investment-grade corporate bonds, but are cognizant of the risks associated with higher-yielding assets

and want to strike the right balance between them. As one study participant said, the current low-rate

environment is forcing their public pension fund to “accelerate the search for alternative return streams in

the fixed income space to manage risk and generate income.”

Given the choice of several options known to provide higher potential yields, the majority of respondents

cited core plus strategies that typically invest in a mix of government and investment-grade corporate

bonds that are complemented by smaller allocations to high-yield, global and Emerging Market debt.

Moreover, this preference is just as evident in the relatively high percentage of responses mentioning both

high yield and EM debt more specifically.

Private credit is another highly sought-after investment of institutions seeking more yield. In fact, a very

large number of corporate and public pension plans had it right at the top of their preferred options.

“Our plan includes seeing how well private credit fits in with our other two strategies within fixed income

and looking at any possible opportunities to improve yield and diversifications,” said one public pension

fund respondent.

Investment Options to Increase Yield

Other

Preferred Shares

Leveraged Credit

Convertible Bonds

Opportunistic /Unconstrained

Market DebtEmerging

High Yield

Private Credit

Core Plus 11%

44%

83%

Overall Totals Private Credit Breakdown

Corporates Publics E&Fs

Note: Based on 31 respondents Source: Coalition Greenwich 2022 Fixed Income Investing Study, March 25, 2022

Still, some asset owners are hesitant about allocating to private credit, mostly due to liquidity concerns

and insufficient risk-adjust returns. That said, fees are also a primary deterrent, especially amongst

endowments and foundations surveyed in the study.

Interestingly, when asked about their existing fixed income portfolios, only 3% of respondents say they are

highly reliant on it to satisfy short-term liquidity needs. Meanwhile, the risk factors they identify with most

include exposure to global markets, credit defaults, interest rate cycles and the duration of the portfolio.

Reasons for Not Investing in Private Credit

Default

Fees

Adjusted ReturnsInsuficient Risk

Liquidity

Ranked #1 Ranked #2 Ranked #3 Ranked #

Note: Based on 31 respondents Source: Coalition Greenwich 2022 Fixed Income Investing Study, March 25, 2022

Important Attributes of a Fixed Income Manager

Average Rating Total Corporates Publics E&Fs Team Composition & Capabilities Length of Track Record Addresses Regulatory Requirements Sourcing Network in The Asset ClassHas Local Market Expertise & Has Global Expertise in The Asset Class Quality of Reporting Dedicated to Fixed IncomeInvestment Team Size Incorporates ESG Requirements Total Private Markets AUM Using a 5-point scale, where 1 is “Not Important” and 5 is “Extremely Important” Note: Based on 31 respondents Source: Coalition Greenwich 2022 Fixed Income Investing Study, March 25, 2022

Conclusion

Canadian institutional investors understand the important role that fixed income plays in their portfolios.

It helps them manage volatility and preserve capital, while also generating income and the potential of

more stable returns than equities. But asset owners also recognize that their fixed income portfolios must

evolve to be fully worthwhile and meet the changing ESG requirements of their stakeholders.

In today’s low interest rate environment, more emphasis than ever is being placed on higher-yielding assets

like private credit and strategies that can allocate beyond government and investment-grade corporate

bonds towards high-yield and Emerging Market debt.

In doing so, asset owners are carefully weighing opportunities against risks and seeking out the most

experienced and knowledgeable asset managers to help them strike the right balance.

FUND1247 04-22-E

The views expressed in this insight based off of the 2022 Greenwich Research. The views are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. The commentaries contained herein are provided as a general source of information based on information available as of May 11, 2022 and are not intended to be comprehensive investment advice applicable to the circumstances of the individual. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained here. This report is provided for informational purposes only and is not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. The comments should not be construed as recommendations to invest in any products or services but rather an illustration of broader concepts AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets. ® The “AGF” logo is a registered trademark of AGF Management Limited and used under licence. Publication date: May 24, 2022.

For more information please visit AGF.com.