Moving away from aggregate or composite-bond portfolios that mix credit and sovereign debt to awarding specific mandates will give the $12.8 billion Government Employees Superannuation Board (GESB) greater control of its fixed income portfolio.

GESB recently announced $2.28 billion of new fixed-income mandates to three managers, and a wide-ranging restructure of its fixed-income portfolio.

Steve McKenna, acting chief investment officer at the Perth-based fund, says that splitting its fixed-income portfolio into global government bonds and global investment-grade bonds was a reaction to the some of the difficulties the fund experienced in 2007 with its credit exposures and would help manage current concerns around sovereign risk.

“In 2007, the way GESB had its fixed-income investments arranged was generally in aggregate and composite-bond portfolios that mixed sovereign debt and credit and what that meant was that it was in the managers’ ability to change the mix between sovereign and credit – not really a lever that we could pull at the GESB level,” he says.

McKenna says that the old aggregate-style portfolios limited the fund’s capacity to move considerably away from a manager’s benchmark when wanting to change the underlying mix of credit and sovereign debt.

“Back in 2007 it turned out credit was the issue and that was the thing you really wanted to avoid. Fast forward to 2011/12 and a lot of the problems are in sovereigns.”

McKenna, who as well as performing the role of acting-chief investment officer also develops strategies for GESB’s fixed income, alternatives and cash asset classes, says the new structure also attempts to deal with inherent flaws in bond indices.

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