Last month, Australia’s superannuation funds watched the United Kingdom’s corporate pension funds desperately scramble to sell assets in a bid to generate liquidity and meet margin calls following a sudden spike in interest rates.
Although the issue revealed systemic problems in the way UK pension funds hedge interest rate risk, John Livanas, chief executive of State Super, believes Australian funds are unlikely to run into the same problems due to very different investment philosophies.
“Australia is very different, and to superannuation funds, bonds are just another asset class,” Livanas told AsianInvestor.
Prior to this year, when interest rates were very low, the majority of super funds didn’t really have the capacity or the need for bonds for a number of reasons, he said.
“Firstly, it wasn’t giving great returns, and secondly, the thing is that bonds are defensive assets — which means if the world ends, the price of the bonds go up. But as the price of the bonds were already so high it was more likely the price would go down, which is exactly what happened as the interest rates rose,” said Livanas.
At State Super, which is a closed defined benefit fund, the goal is similar to that of the major Australian superannuation funds, which is to manage a growth portfolio.
“A growth-type portfolio is heavy on equities, alternative investments, and very few bonds — which creates a way of meeting the targeted return that we need to generate to meet our liabilities in the future. Which is why the UK pension problem is not really something that could affect most Australian funds.”
ASIA NET OUTFLOWS
As central banks like the US Federal Reserve continue to raise interest rates to get inflation back down to target, it is creating meaningful losses in the bond markets, according to Jonathan Liang, managing director and Asia ex-Japan head of fixed income investment specialists at JP Morgan Asset Management. As such, fixed income investments are still in a net outflow mode globally.
“When we look at the numbers, we're seeing the most outflows mainly coming from Asia-related fixed income, and I think that definitely has something to do with the China real estate crisis. However, the developed markets category has also seen outflows,” Liang told AsianInvestor.
One interesting trend, where Liang and his team are observing inflows into fixed income, is in the Mutual Recognition of Funds scheme (MRF). Under this scheme, mainland Chinese investors can buy certain registered Hong Kong domiciled funds, and Hong Kong investors can also buy onshore products.
“As US Treasury yields spiked up past Chinese government bond yields, we began to see a lot of interest around the middle of the year for developed market fixed income products. That interest turned into flows in the third quarter of this year and Chinese investors have tended to gravitate towards higher quality, longer duration mandates,” he said.
TRENDS DOWN UNDER
As market uncertainty persists, Liang says he has observed some interest from Australian super funds towards more benchmark aware fixed income but it falls far short of a wholesale pivot to the asset class.
The bigger trend in Australia is the introduction of the ‘Your Future, Your Super’ regulatory framework, he said.
“The regulation means that there are now certain penalties that funds incur if they underperform against their benchmark over eight years,” said Liang.
‘So what we're seeing is actually more supers looking for active managers that stay closer to benchmarks that have very low tracking error.”
Amid the market volatility, Liang said that asset owners aren’t yet seeking safety in fixed income but are seeking safety in cash.
“Many clients are now referencing that certain banks are paying up to 4% interest if you lock it up for 12 months, and there has been some gravitation towards that,” he said.
“However, there are also some investors who are looking at fixed income and several CIOs of private banks in Asia, are making a call that yields in fixed income are now back to reasonable levels, and advocating for bonds to once again become a meaningful part of investors’ asset allocation.”