EDITOR’S LETTER | A challenging market environment presents chief investment officers with a major dilemma: either ramp up the level of risk they are prepared to take on in their portfolios or revise down their fund’s advertised return targets.

Most CIOs are reluctant to do much of either and are instead trying to beat a third path to success, via alternative sources of returns.

Traditional fixed income, cash and currency markets are not delivering the way they used to. Meanwhile, major equity-market valuations mostly look pretty full.

This has all led to an increased appetite for private credit, emerging-market stocks and bonds, and unlisted asset classes such as global infrastructure, real-estate trusts, hedge funds, and private equity.

But as always happens when everyone has the same idea, those markets are getting crowded, too. There is a real danger that, unless superannuation funds take the plunge and lower their targets, the temptation for their managers to take unacceptable risks will prove too great.

That’s worth pondering as we mark the 10th anniversary of the start of the sub-prime mortgage crisis in the US, which precipitated the global financial crisis.

A decade on – and a colossal amount of bailout money and central bank stimulus later – a growing band of respected economists warn global markets are nursing an unsustainable “debt hangover” propping up asset bubbles that must inevitably pop, or at the very least deflate.

Former banker and corporate treasurer, turned consultant and author, Satyajit Das, goes as far as to warn that: “Somewhere along the line, the world became one big carry trade”.

July 2017 marks another, more positive, anniversary – it’s 25 years since the introduction of Australia’s compulsory retirement savings system. During that time, a cottage industry has grown into a $2.2 trillion behemoth, worth more than annual gross domestic product or the total market capitalisation of the local stock exchange.

The mandated inflows aren’t all that have driven that growth. A period of unprecedented domestic economic growth and falling global interest rates has supported a purple patch for investment returns.

SuperRatings data shows that in mid-June, Australia’s top-performing super funds were on track for another year of double-digit returns. But the warning that “historical performance may not be indicative of future returns” may prove more prescient than ever.

Beyond the short-term risks, today’s long-term outlook for interest rates – and thereby yields on major asset classes – could hardly be more different than it was when the superannuation guarantee was legislated in 1992.

Going forward, if local super funds want to stand any chance of meeting typical balanced fund return targets of CPI + 3 to 4 per cent, they are probably going to have to seek out more offshore assets and unlisted opportunities.

Happy bargain hunting.

This Letter from the Editor first appeared in the July print edition of Investment Magazine. To subscribe and have the magazine delivered CLICK HERE. To sign-up for our free regular email newsletters CLICK HERE.