Sept 02: Professional investors are becoming increasingly concerned about the increased issuance of bonds from AI hyperscalers such as Amazon, Google and Meta.
A survey of retail investment fund selectors — IFAs, discretionary fund managers and private bankers — commissioned by Rathbones Asset Management found that, as AI hyperscalers shift from self-funding to issuing billions of dollars in new debt, 94% of respondents see the potential supply surge as a risk for passive investors that may gain exposure to these bonds without issuer-level assessment.
Bryn Jones, Head of Fixed Income, Rathbones Asset Management, said: “This shift towards debt issuance by AI hyperscalers highlights a potential blind spot for passive investors. As companies such as Amazon, Google and Meta turn increasingly to bond markets to fund significant AI infrastructure spending, a rise in new supply could see index-tracking strategies absorb more of that debt without assessing whether the underlying credit risk represents good value. For active fixed income managers, this creates an opportunity to scrutinise the fundamentals, pricing and sustainability of that borrowing rather than simply following an index.”
Fund selectors recognise wider risks in passive fixed income
Beyond the immediate supply concerns linked to AI-related bond issuance, many study participants also recognise the structural risks associated with passive fixed income strategies. However, just 5% say they are familiar with the historical performance of active managers relative to passive approaches.
More than half (51%) are aware of the possibility of liquidity and pricing mismatches in index-tracking fixed income strategies, while 48% note the inherent issuance-weighted bias.
Forty-five percent say selling downgraded bonds, or “fallen angels”, can be a risk for passive managers, while 44% identify exposure to asymmetric return profiles as a challenge with passive investing.
Jones added: “While fund selectors recognise many of the structural limitations of passive fixed income, there is still a significant knowledge gap around the potential role of active management. Only 5% of respondents are familiar with the historical performance of active managers relative to passive approaches, despite the scope for active managers to address issues such as liquidity mismatches, issuance-weighted index bias and the selling of downgraded bonds. This suggests there is an opportunity to look beyond the apparent simplicity of index investing and consider whether it is the most effective way to navigate today’s increasingly complex fixed income markets.”
“The survey also highlights how the mechanical features of passive indexing are shaping respondents’ preference for active fixed income managers. Almost all (96%) say the requirement to sell fallen angels at the point of maximum price weakness — and then buy rising stars once prices have already tightened — affects their preference for managers who can trade these transitions ahead of the index.”