“You can no longer rely on equities,” says Jean Thouvenin, head of global business development at Pictet. “Fixed income has a much more important role to play and bonds no longer sit on the sidelines while equities return 14% or 15%. Investors are moving into the bond markets and they want to make these investments count.”

Robeco, which has E15.42bn of institutional fixed income assets under management for its European clients (see table on page 17), won E800m and E1.6bn of new business in 2003 and 2002 respectively and Edith Siermann, head of fixed income at the firm, is unsurprised by the house’s gains.

“There has been a definite shift towards fixed income products and this is down to its absolute performance compared with equities,” she says. “And within the fixed income spectrum clients are keen to move away from traditional assets and, as such, our high-yield products are thriving.

“Although these have added risk, our clients are not nervous about putting their money into these vehicles. When they compare this with how they have been treated by the equity markets, they are not worried.”

Italian connections

State Street Global Advisors, which has E6.12bn of European fixed income pension fund assets under management, has one of the widest spreads of European fixed income clients (see table on page 17). The house is active in nine countries and, although more than 50% of its fixed income business is managed on behalf of its UK clients, it is one of the few houses that manages bonds for Italian investors.

Mark Talbot, head of international bonds at State Street Global Advisors, says: “Italy is a big market for us. Other managers are less active in the Italian market than we are, but we take it seriously. We have Italian personnel working in our London office who take care of the business out there and having these local people in place is key to being a serious contender in this market.”

For its Italian clients, State Street has E668m of Eurozone fixed-rate bonds under management, E572m of global fixed-rate paper and E356m of short-term debt with a maturity of less than one year. Of all the respondents to epn’s survey, State Street came out as the biggest player in the Italian market in front of BNP Paribas, which has E1.05bn of fixed income assets under management (see table below) and Henderson, with E370m. But Pictet’s Thouvenin (the firm does not manage any institutional assets for Italian investors) believes that if a house can offer products that provide an attractive pick-up over government bonds, then the Italian market can be easily accessed.

“We are looking to further extend market share in our home market in Switzerland and selected areas in Europe. In Germany and Italy the big players that are already there have the lion’s share in managing government bond portfolios but if you can provide sexier higher-yielding opportunities then you have a distinctive business proposition. People are keen to obtain more than the returns they are getting from government paper.”

Falling global interest rates have brought government bond yields down to historic lows and, as the returns on 10-year American and German bonds have fallen from 4.85% and 4.98% to 3.35% and 3.68% respectively in the last 12 months, investors have begun to move down the credit spectrum. In the last three months European sovereign issuance has fallen from US$66.1bn to US$43.7bn, while corporate bond issuance has risen by US$6bn and Talbot is unsurprised.

“Government bond yields are so low at the moment that people are looking anywhere they can to get the extra yield they need – and they are getting those returns in the corporate bond market,” he says. “A lot of money is being moved away from government and high-grade paper, and corporate bonds, at the lower end of the investment grade spectrum, are lapping up the supply.”

Thouvenin agrees: “Enhancing alpha has become central to the fixed income business and that has alerted investors to the role of credit, whether it is high grade, high yield or emerging debt. Our clients have always been typically conservative but their mood is changing.

“Not so long ago the average investor would only move down as far as A names but some are more than happy to buy BBB bonds. They are now willing to allocate a percentage of their funds to high-yield bonds and emerging sovereign debt.”

Fortis, which has E11.9bn of institutional fixed income assets under management for its European clients (see table on page 14), is one of the most active houses in high-yield and emerging debt. It has just under E80m of emerging market paper under management for its French clients and just over E40m under management for its Belgian customers. And so far this year it has garnered more than E1.5m of new emerging market business from its clients in Belgium and the Netherlands.

Threadneedle, the newly acquired arm of American Express, is also active in the high-yield market. It manages just under E50m of Eurozone high-yield and emerging market debt for its clients in the UK and the Netherlands and has won just under E30m of new high yield business this year.

But this push down the credit spectrum comes as European corporate defaults reach record highs. Last year 32 issuers defaulted on E43bn worth of debt and Fitch Ratings downgraded nearly 430 corporate borrowers. Talbot at State Street, however, which does not have any of its fixed-income assets invested in high-yield or emerging market paper, is unphased by the continued threat of defaults – he believes the situation is improving.

“The default rate is a worry but corporates are starting to de-leverage and that is a positive step,” he says. “A few years ago telcommunication companies took on far too much debt to pay for third generation licences but this type of over borrowing is not now commonplace. The downgrade figures are improving and this de-leveraging will help going forward.”

Of all the respondents to epn’s survey, Credit Suisse Asset Management came out as having the largest amount of fixed income assets under management. The house, which is active in five European countries, manages E105.55bn of institutional fixed income assets for its European investors, the bulk of which is managed in the Swiss domestic bond market. Of the top four houses, State Street Global Advisors is the fourth largest with E29.5bn behind Legal & General Investment Management in third (E33.73bn) and BNP Paribas Asset Management in second (E45.05bn).

BNP Paribas, which is active in 11 European states, won E1.53bn of new business from new and existing clients in 2002. The house picked up the majority of this business from its French home market (E499m) but it also secured E154.3m worth of global fixed business from its Irish clients and E172.5m of fixed-rate Eurozone and European business from investors in Italy.

And Patrick Barbe, head of European fixed income at BNP, is adamant that the French house can win more. As the returns on equities get tighter and investors get more sophisticated, Barbe believes that only the larger houses will be able to meet the demands of fixed income investors.

Barbe says: “Investors are getting more and more experienced and because the equity markets are failing to deliver the performance levels that they want, these investors are bringing this experience to the fixed income market. They know what the key issues are and what we can see happening is that of all the new business we are acquiring, the majority has come from our competitors. Investors will no longer stick with a badly performing house, those times have changed.”

Thouvenin adds: “Investors are much more focused on picking managers that can quantify and adequately diversify these risks and show a proven track record.”

The survey also showed that managers were the most active for their UK fixed income clients. Legal & General Invest­ment Management, which has E33.73bn of institutional fixed income assets under management for its European clients, manages E33.7bn of this for its domestic fixed rate and global fixed rate clients in the UK and Credit Suisse Asset Management manages more than E25bn of fixed income assets for its UK investors. Of this just over E10bn is invested in UK bonds, E8.58bn is placed in Eurozone paper and E5.92bn is held in global instruments.

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