InvestmentsMar 23 2018

Fear of another correction fails to deter investors

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Fixed income has been a favourite for investors but a market correction could be on its way, a senior investment specialist has warned.

Speaking to FTAdviser's sister title Money Management's Craig Rickman, Harriet Steel, global head of business development at Hermes, commented: "It wasn't just UK investors [who piled money into the markets in 2017] but also in Europe, 2017 was the biggest year ever for annual fund inflows into European funds.

"It was a very strong year indeed. So far we have seen a continuation of the same patterns, with the first quarter of 2018 so far being even stronger than it was in 2017."

She said Hermes has seen strong inflows into global emerging market equities, as well as strong inflows into global high yield strategies, fixed income and credit - particularly funds that offer a degree of protection.

"We are seeing in fixed income is that both institutional and financial intermediaries are looking for dynamically allocated, unconstrained solutions, that allow these strategies to weather the inflection point better and give them more downside protection", she said.

Driving this sort of awareness is important and it will catalyse a number of firms to look at what they can do to improve gender pay.

Moreover, there is interest in "all things environmental, sustainable and governance (ESG)", Ms Steel said. "It is moving into the mainstream and this is the trend that we are beginning to see".

Although markets witnessed significant falls during February this year, Ms Steel said investors needed to take into account the fact these moves were "largely technical", driven by short volatility positions. 

"In a low-yield environment, investors in their desperate search for yield were willing to sell volatility options to take in the premium to enhance the yield of their overall portfolios", she explained.

"That is all very well, until you hit the sort of market levels that cease the technical market corrections that we saw in February."

She said she did not want to trivialise [this correction] as markets were at high levels, as "we could be due for a much deeper market correction - that is the conventional wisdom - and it is unclear as to what the triggers to that correction could be.

Moreover, Ms Steel added: "We are still in a relatively favourable macroeconomic backdrop globally but there are number of triggers that could catalyse a correction."

Ms Steel - who was the first woman director to sit on the board at Hermes - also told Mr Rickman about the challenges of tackling the gender pay gap.

"This will be a seminal year as firms are required to disclose and this means you have to face the truth of your numbers.

"Driving this sort of awareness is important and it will catalyse a number of firms to look at what they can do to improve gender pay."

simoney.kyriakou@ft.com