Alternative Fixed Income: Upcoming growth and how to capture it
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Article Type
Research
Topics
Solutions, Alternative fixed income
Published
April 22, 2025
Read time
15 mins
Authors
Daniel Torres
Gertjan Medendorp
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Alternative fixed income has become increasingly important for institutional investors in recent years. It provides opportunities to increase the portfolio yield, decrease the risk – through more diversification, and reduce capital requirements, when the (often lower) liquidity of these assets is less of a constraint. Alternative fixed income is also well-suited for responsible investing, for investors who aim to finance a more sustainable world whilst protecting their portfolio against ESG risks.

 

Different needs, different strategies

 

In the table below we compare different Aegon AM strategies within the alternative fixed income spectrum. It is important to note that the scores on the different dimensions can (and will) shift over time and that the assessment is sometimes based on qualitive instead of quantitative measures (the sustainable financing column in Table 2 being an example). Capital charges are determined with the standard formula of the Solvency II regulations.

 

Comparing different alternative fixed income strategies

Table 2: Characteristics of a variety of alternative fixed income asset classes (for illustrative purposes only). Indicative spreads in EUR. Risk ratings in this table are either external (when available) or internal (for unrated instruments). The qualitative determination of the risk profile may take into account additional sources of protection such as guarantees. ). Capital charges are determined with the standard formula of the Solvency II regulations. We here consider the matching properties for an investor with long-term liabilities. ESG Factors refers to the possibility of ESG integration (see also footnote 18). Sources: Bloomberg, Aegon AM, La Banque Postale Asset Management, as at December 31, 2024 or latest available. *Subject to regulatory approval.

 

In the full paper, the different characteristics of each asset class in Table 2 are discussed in more detail.

 

Conclusions

 

  • The private debt market has grown notably in recent years and is forecast to grow at a larger pace. This growth is caused by different trends, most importantly the search for yield, diversification, and responsible investing. Private debt also forecasts the largest growth in internal rate of return within European private markets.
  • Alternative fixed income has become an important part of portfolios of institutional investors in recent years. These assets give access to new markets, like direct lending to consumers via residential mortgages or via large pools of consumer debt. This diversifies traditional fixed income portfolios, with their heavy tilt toward government and corporate debt. Many alternative fixed income assets also offer an attractive illiquidity premium compared to liquid debt. Investors with long-term liabilities typically have a significant budget for illiquid investments and can thus harvest this premium with assets that fit well into their matching portfolio.
  • Alternative fixed income is also well-suited for sustainable investing. This asset class often finances projects that do not have easy access to capital markets and would otherwise receive less financing. Sustainable investing in infrastructure, for instance, is already a major trend. Opportunities in renewables, water treatment, communications, and mobility, in both developed and emerging countries are also available.
  • From a capital point of view, many alternative assets are also treated favorably. Examples are mortgages, insured private loans, export credit agency loans and other illiquid loans with a government guarantee. For asset-backed securities, capital charges have also been reduced for the Simple, Transparent and Standard subcategory.
  • Alternative fixed income strategies thus show a great variety in terms of spread, risk, capital charge, liquidity, duration matching and opportunities for responsible investing. This enables investors to choose those assets which best fit their particular investment needs, by taking the different characteristics of these assets into account. 

 

Authors

Daniel Torres
Senior Investment Solutions Consultant

Daniel Torres is an Senior Investment Solutions Consultant in the Fixed Income, LDI and Investment Solutions team.

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Gertjan Medendorp
Investment Strategist

Gertjan Medendorp CFA, is a senior investment strategist within the Fiduciary Services & Investment Solutions team.

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Alternative fixed income: Trends and opportunities
Download the full paper
Alternative fixed income: Trends and opportunities
Download the full paper
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