Australian super funds’ relatively low exposure to bonds is set to rise, as funds including HESTA reassess the role that assets like hedge fund-of-funds have previously played in their ‘defensive’ portfolios.

A recent Towers Watson survey revealed that the average Australian superannuation fund’s exposure to bonds was just 12 per cent, compared to US funds with 35 per cent and UK funds with 45 per cent, partly due to this country’s lower reliance on defined benefit pensions, but also because funds here had believed ‘alternative’ assets like infrastructure or even hedge fund-of-funds could play the traditional bond role of providing stable long-term income and modest capital growth.

The chief investment officer of HESTA, Rob Fowler, said yesterday that the fund’s “defensive bucket” was being reviewed, in light of the discovery that hedge fund-of-funds, despite their promises of low risk through diversity, had proven to be “no substitute” for bonds as a capital preserver.

The world’s largest bond manager, PIMCO, is counting on investors looking anew at bonds in light of well-publicised disasters in some of their supposed ‘alternative’ proxies, as well as the depressed outlook for equity markets in the medium term, as the Western world deleverages and saves.

The head of PIMCO’s wealth management division in Australia, Peter Dorrian, said yesterday there was a good chance super fund members perusing their 2009-10 annual reports would see the ‘capital stable’ option outperforming the ‘balanced’ or ‘growth’ option for the third year running, and potentially question whether the stellar returns of equities in the 20 years up to 2008 could ever be repeated.

“Look at the financial services sector, which is 19 per cent of the global equity benchmark. It’s facing regulatory forces which will depress its ability to make money in the future – Goldman Sachs won’t be able to be 30 times levered anymore,” Dorrian said, as one example of a headwind facing equities.

The travails of Greece were encouraging a new approach from investors to fixed income itself, Dorrian said, as it reinforced the fact that “interest rate risk” could no longer be applied across the debt of all developed economies.

Whereas the cost of a credit default swap was negligible for all investment-grade sovereign issues in 2007, the spread had slowly ticked up to the point where a CDS on Greek debt now costs a whopping 726 basis points, and even insuring against defaults in Germany, US, UK or Australia costs in the 20-30 bps range.

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