New era for alternatives as investors flock to fixed income

Alternative debt is set to benefit from the move towards fixed income, as investors fall out of love with volatile equities in a turbulent economic environment.

Recent data from Interactive Investor showed that private investor demand for fixed income has hit new highs.

The investment platform said that its customer purchases of direct fixed income and corporate bonds combined has grown by 678 per cent over the past 12 months, compared to the previous year.

A UK two-year gilt yield was 4.75 per cent on 19 September, up from 4.6 per cent on 30 September 2022, according to MarketWatch data cited by Interactive Investor.

Read more: P2P will benefit from peak in interest rates

Short term fixed income yields are even higher than they were a year ago, and July 2023 saw the platform’s highest monthly spike to date as bond yields climbed higher.

“While the end just might be in sight for UK interest rate rises, for now private investors have been taking advantage of attractive bond yields and locking in an income assuming they intend to hold the bonds to maturity,” said Sam Benstead, bonds specialist at Interactive Investor.

While Interactive Investor’s focus is on gilts and corporate bonds, some stakeholders suggest that this trend could filter into alternative credit strategies.

“Something of a see-saw movement between fixed income and equity is quite normal, but I think that many of those discovering alternative lending now will see the benefit of committing a greater portion of their wealth in fixed income for longer periods, even when the see-saw dips back the other way,” said Neil Faulkner, managing director of peer-to-peer lending research and ratings firm 4th Way.

Read more: IMF forecasts interest rates to fall to pre-pandemic levels

“Fixed income has generally been considered boring and low return, but P2P lending and similar investments have shown highly satisfactory, stable returns – but also with the opportunity to invest in more exciting types of loans too. As a result, less cash will return to equities when the tide changes.”

Bruce Davis, founder and joint managing director of ethical crowd bonds platform Abundance Investment, agreed that alternative investments could benefit from this shift.

“The rise in interest rates has rekindled interest in longer term investments which pay a fixed income that either compensates for the accompanying inflation increases in prices or which gives a degree of certainty to future income earned from an investment pot,” he said. “Our Community Municipal Investments – which have seen returns for investors increase five-fold in the last few months – are definitely benefiting from this trend.”

Furthermore, recent research from European P2P platform Robo.cash suggested that P2P investments could replace bonds for investors seeking fixed yield.

“Fixed-income instruments are a good ‘support’ for portfolio returns, that help to offset losses from high-risk assets such as stocks, futures and options,” a Robo.cash analyst told Alternative Credit Investor via email.

“According to the latest investor survey conducted by Robo.cash, the top three investments for 2023 include stocks, ETF and P2P, which also emphasizes the quality approach investors take to portfolio composition.

“In terms of historical dynamics, fixed income instruments show positive shifts. For example, deposit rates started to rise in the second half of 2022, although inflation gave a quick start in mid-2020. The BGATRI (Bloomberg Global Aggregate Total Return Index) bond index also began to grow in 2022 after the growth of the key rates of the central bank.”

The Robo.cash analyst also noted increasing yields in the European P2P market since March last year, which have now breached the 10 per cent mark and are expected to rise further towards the end of the year.

“In combination with other alternative assets such as cryptocurrency, P2P can bring even higher returns but at the same time increase the risks,” the analyst added. “This is something to keep in mind for investors who prefer more traditional instruments. But to cover inflation, you need to take risks. And in this case, the choice of a better combination is left to the investor.

“Being a fixed instrument by nature, P2P investments may become a great alternative to deposits and bonds in the future when they become more solid as an asset.”