The reality of having bond yields in the negative territory is deeply challenging to asset owners, and super funds might need to re-examine return objectives, said Jim Christensen, chief investment officer at QIC.

“We have got to marry up what we see in the market with objectives which are typically real return of CPI+, and even for conservative funds this could be even CPI +2 per cent,” Christensen said.

“The challenge for us, for people who want reasonably safe funds and some income to meet their objectives, is enormous right now.”

This is because typically, those funds have relied on both cash and bonds to deliver an income, but real rates for bond yields and cash rate are now in, or close to, negative territory.

“That’s creating a challenge for those that are running funds on the conservative side, which is putting pressure for them to take riskier assets, which is a place you really don’t go to with these funds.”

It is QIC’s view that risking up should not be pursued, and in some instances they are suggesting to their clients on the funds management side that maybe the objective should be lowered.

“[Though] some other clients take a different view, that they will take a bit more risk as they’ve got longer time horizons to do that.”

Christensen added QIC had generally maintained risk levels because the world remained uncertain, and central banks and policy makers were constrained with what they could do. Fixed income, cash and currency were particular areas experiencing this.

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“In that world where it’s not clear things are going to get better, bonds remain pretty well bid. You have them as a hedge against inflation because you can’t make a case to hold high quality government bonds for any other reason,” he said.

“If you look at where a lot of long-only managers have been, they’ve been underweight bonds for some time. We own bonds for diversification, but it creates challenges.”


Jim Christensen will be speaking at the Fixed Income, Cash and Currency Forum in Melbourne on the topic of ‘Have central banks lost the ability to influence markets?’.  To register for the event click here.

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