Navigating the ‘real’ Great Rotation

Commentators have suggested that in search of better returns, investors are undergoing a 'Great Rotation' out of fixed income into higher risk assets. However, we consider a more nuanced approach.

In a low-yield environment, investors naturally turn to equities in pursuit of better returns, which leads to what market commentators have called a ‘Great Rotation’ out of fixed income into higher risk assets.  Such a notion dismisses the demographical context of developed countries. With this in mind we consider a more nuanced approach to the ‘Great Rotation’.

The population of developed countries is ageing. Aside from most pensioners, older people generally have higher incomes. Figures from the US Federal Reserve for example show that, between 1998 and 2007 the mean net worth of individuals between the ages of 55 and 64 years old rose to $936,000. In contrast, the mean net worth of individuals between the ages of 35 and 44 years old reached $326,000 over the same time period.

As investors near retirement, their appetite for higher risk assets diminishes and they seek the assurance of fixed income investments that provide regular return streams.

Instead of completely rotating out of fixed income strategies, investors are relying on asset managers to find alternative yield opportunities in other areas of global fixed income such as Emerging Market, corporate and convertible bonds. What we call the ‘real’ Great Rotation is now in motion, and this shift is forcing investment managers to re-assess their technology capabilities to support these non-traditional investments, which normally incur a higher level of complexity with regards to pricing, trading and booking.

The shift towards Emerging Market debt

Asset managers can no longer rely upon traditional fixed income assets, such as developed market government bonds, to generate sufficient returns. Instead, they are now diversifying towards the likes of Emerging Market debt. In August 2013, Ashmore Group, a UK investment manager specializing in emerging markets, stated that the emerging market fixed income universe had expanded from $12.7 trillion in 2011 to $14 trillion in 2012: a 10.6% year-on-year increase. This evidence supports the hypothesis of a shift within fixed income towards high yield Emerging Market debt as opposed to a shift away from fixed income assets towards equities.

Seizing the opportunity

When such opportunities arise within fixed income strategies, asset managers need to respond quickly. As investors become more demanding, they become less forgiving to those who cannot deliver on this front. Having the speed and flexibility to seize the opportunity is the real challenge here, and with asset managers dedicating as much as 31% of their spending to IT, a system that is flexible and not obstacle to change is imperative. However, the side effect of a more diversified and adventurous strategy is higher demand for increased levels of forensic detail from investors.

How a consolidated system can offer competitive advantage

In a recent report, the Boston Consulting Group suggested that managers need to become ‘ambidextrous’, by retaining core assets in their portfolio, while simultaneously developing new solutions.

Such innovation is dependent on having the right system in place. An increasing realization among asset managers is that they need to have a real-time view of every position they manage across all asset classes. A single consolidated platform can fulfil this and run numerous orders in a precise manner to facilitate a true Investment Book of Records (IBOR), which can also reduce reputation, regulatory and operational risk.  

In the past, competitive advantage was gained from attracting talented managers, now we see that IT systems can offer such an advantage and help mangers stand out from the crowd.


The ‘real’ Great Rotation that we see is not shifting aggressively into equities, but rather it is diversifying within fixed income into higher yielding instruments, supported by the demographic dynamic in developed countries and justified by inflows into Emerging Market and corporate debt. 

To be successful in this environment, an asset manager needs a sophisticated end-to-end solution that supports a wide range of asset classes. An integrated platform that offers comprehensive pre- and post-trade controls and which provides the best time-to-market to trade new assets, while keeping the total cost of ownership (TCO) of technology as low as possible is  the modern-day differentiator between success and stagnation.

Download the full report ‘The ‘real’ great rotation’ here

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