Fixed income opportunities there for funds who recognise their value

The Australian fixed income market is big enough to support the superannuation industry, but partly only because many default options aren’t heavily invested in the asset class, the Bloomberg Buy-Side Forum heard today.

A combination of a domestic fixed income that is lighter-on in Government bonds than many international counterparts and a growing need for fixed income investment as larger numbers of people hit retirement had cast some doubt on the capacity of the market to support returns suited to longer drawdown periods.

First State Super chief investment officer, Damian Graham, believed that there was sufficient availability for the demand the superannuation industry had, however, as “the average default options in Australia are pretty lowly exposed to fixed income, particularly at the moment”.

While the market was big enough at a Government level however, Graham noted that at a credit market level the market was lagging. That would take a long-term view to rectify, he warned, but there was promise that shrinking bank balance sheets and potential growth in government issuances could lead to wgrowth.

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Mercer chief investment officer – Pacific, Kylie Willment, similarly saw potential in the fixed income market growing, but with an eye to the private sector. She told the Forum that institutional investors would increasingly have opportunities to get into private debt in Australia.

Looking at bank-loaned debt, for example, could offer yield that was “very appealing”, especially at this point in the yield cycle.

Willment noted that Mercer leant towards these sorts of options in its fixed income investments, which were admittedly a relatively small portion of its portfolios: “We have very little of those traditional fixed interest options in our portfolios,” she said. “We’ve swapped them out for things like the growth fixed interest assets, things like high-yield emerging market debt.”

On generating alpha through duration positions, Graham, who took a more aggressive approach to fixed income investments with First State Super allocating 10 – 20 per cent of its portfolios to the asset class, said that very high quality decisions were key.

“It’s about taking risks when you have as much confidence in the outcome as you can … I’d make sure you’re not taking unintended or uncompensated positions in portfolios,” he said. “Trying to have a big duration position or a big currency positions, those things we don’t necessarily think are high quality positions.”