DON RUSSELL: My 4.5 per cent over inflation is still worth reaching for. If we settled for 2.5 per cent real and just put it in cash, it’s costing the people of NSW $600 million a year versus 4.5 – because we’re an underfunded defined benefit scheme. KENT WILKES: You can reach for that with assets like commodities, which aren’t explicitly aligned with inflation outcomes, and you’re going to incur massive volatility. Some years you’re going to be way over, and other years you’re going to be a long way under. But there are assets out there that are explicitly linked to inflationlinked liabilities, so at least you’re halfway there. JOHN COOMBE: If you think we’re going to have rising inflation, you’re going to have rising interest rates. And maybe it’s just my age, but I’ve never been in a market where we’ve had rising interest rates and the equity market behaved well. And other assets didn’t behave well either, actually JON GLASS: Should we just give every asset manager a CPI plus 4.5 per cent benchmark, and see if they’re prepared to step up and take on that mandate and get penalised if they underperform. KENT WILKES: You’d get rid of a lot of problems that are inherent in benchmarks, such as the moral hazard issues in inflationlinked bond benchmarks, and you’d get rid of excessive interest rate volatility and excessive interest rate risk. SEAN HENAGHAN: It would be good for the consulting industry, John [Coombe], because you’d have to develop some whizbang monitoring frameworks. But in reality I don’t think that’s a target for equity managers – it’s a multiasset mandate.
JOHN COOMBE: Anyway, the only thing you can actually say today is if I buy anything, I’m paying top dollar for it. So if I’m buying anything now that I think is going to protect me from inflation – whether it’s commodities, property, infrastructure assets – I’m paying top dollar for it. SUSAN BUCKLEY: What about a NSW Treasury Corporation inflation-linked bond at 3.1 per cent? That’s not bad. So the best strategy is actually to short US four-year real yield, buy Australian real yield and get a pickup of 310 basis points. And you put that in your CPI plus 4 per cent portfolio. JOHN COOMBE: So we’re counting on NSW performing better than the US Government. SUSAN BUCKLEY: Yes, that’s true. That’s reasonable! DON RUSSELL: Historically, that bet’s turned out pretty well. When Jack Lang refused to pay his debt, the Commonwealth stepped in. SIMON MUMME: Ken, you’ve had considerable experience in managing fixed income. What would you like to see your bond portfolio doing at the moment to fight inflation? KEN PHOLSENA: Right now we’ve got like a few passive portfolios, but looking at the bond portfolio alone probably is not going to be enough for us to protect ourselves. For instance, we are also looking at an alternative investment and active equity index.
