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Portuguese investors replace bonds with absolute return

Portugal’s fund selectors are switching part of their bond allocations to absolute return funds. They now have between 10% and 15% of their portfolios allocated to absolute return, and that share is rising.


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According to Expert Investor investment sentiment data, absolute return has been popular in Portugal since the second half of 2014, and the trend shows no signs of abating. Portuguese investors told our researcher on his recent trip to Lisbon that they are gradually moving money from their fixed income buckets to mainly long/short equity and multi-strategy funds.

This trend is backed up by the data: almost half of interviewees plan to increase their weighting to absolute return further this year, while almost no-one is looking to decrease it. At the same time, investment-grade bonds continue to be sold off.




A record 64% of Portugal’s fund buyers plan to increase their exposure to long/short equity

Implementation struggle
Fund selectors encounter two problems in implementing absolute return solutions. First, they struggle to justify paying relatively high fees for products generating only modest returns. And second, their conservative, bond-loving clients are hesitant to replace fixed income holdings with absolute return.

funds. Only in Italy, Spain and Germany, countries where investors have, just like in Portugal, a traditional preference for bonds, demand is at a similar level.

Portuguese investors have an average allocation of only 15-25% to (long only) equities, and they see investing in long/short equity funds as a good way to increase that, without taking additional market risk. Interestingly, the Portuguese interest in long/short equity has only surged recently. At the end of November, just before the current period of equity market weakness started, just a quarter of Portuguese fund buyers planned to increase exposure in the next 12 months. 

Bond bears

As enthusiastic Portugal’s fund buyers are about absolute return (and European equities), as bearish are they about fixed income. Almost half of interviewees will reduce their government bond holdings, a continuation of a longstanding trend that is likely to continue since the looser

fiscal policies of the recently installed left-wing government are likely to lead to underperformance of Portuguese bonds (the key fixed income holdings of the country’s investors).

Corporate bonds are not popular either, with more than a third of fund selectors intending to decrease their exposure. High yield bonds are only marginally less unpopular, with 27% sellers and just 9% buyers. Considering the Portuguese are negative about most fixed income asset classes, it’s no surprise that there aren’t a lot of fans of unconstrained bond funds either. While three quarters of interviewees are invested in this type of funds, just 9% plan to increase their allocation.

Click here to see a full overview of investment sentiment data for Portugal (login required)