QSuper is concentrating into US and Australian bonds in its duration portfolio, as it no longer holds countries with negative yields.
The $60 billion super fund has a lot of duration risk in its overall portfolio, with about a 20 per cent weight to fixed income with a 15 years duration, Damian Lillicrap, head of investment strategy at QSuper, told delegates at AIST’s Superannuation Investment Conference in Cairns.
“We hold it, in large part, to diversify our equity risk,” Lillicrap said. “We believe that we have found [that] a mix of higher duration bonds can lower the typical equity weight, i.e. we’ve got about 35 per cent compared to about 65 per cent, and that should give similar long-term returns for low risk, compared to the traditional portfolio, which have about 90 per cent of the risk in equities.”
He added the superannuation fund was no longer willing to hold those countries that have negative yields as part of this duration portfolio, instead moving to those countries that hadn’t dropped below zero.
“Even though these countries have relatively low yields compared to what they’ve had historically, we still see that those bonds have diversified properties.”
Failure to jumpstart
“This is a personal view, but I believe negative rates are [a] function of what I refer to as secular short termism – basically an outcome produced by short-term tools trying to overcome long-term challenges,” Lillicrap said.
In the low rate and return environment, the pursuit of growth has led to ever more debt in both the government and the private sector, which in turn means it’s ever harder for rates to rise, as they have to fall even further to generate more stimulus.
“The hope continues to be that this process will jumpstart the economy like some sort of stalled car or patient whose heart has stopped beating,” Lillicrap said.
Globally, a lot of local government debt has gone into paying wages, rather than building infrastructure. Meanwhile, most of the private debt has gone into bidding up the price of existing assets.
“So rather than jumpstarting growth, we are seeing too much reliance on short time measures that actually pulls forward growth from the future, and so is a drag on future asset returns.”
He added that negative interest rates, as well as being a symptom of secular short termism, was also the sign that the current approach is going to an end.
“If growth doesn’t come in as we hope – and that has been the case for the last 20 years; that growth has been a bit disappointing, rates have got ever lower and debts got higher – then we are coming to a fork in the road.”
“A path from here can’t be guessed; it will be a function of the decisions made by the authorities and will be driven largely by sentiment, by what the population is most upset about.”
“At present we still believe that our portfolio is right [in] the range of outcomes we see from here. But we are on the lookout for decisions that will indicate that future path.”