QSuper, one of the nation’s largest bondholders, is set to seize opportunities as they unfold in turbulent markets following the harrowing Coronavirus outbreak.
As the crisis took hold this early this month, QSuper investment chief Charles Woodhouse, cut the superannuation fund’s stake in sovereign bonds from 25 per cent to 17 per cent after selling into a strong rally in global bond markets as nervous investors headed for safe havens.
Woodhouse said QSuper’s holding of high-duration sovereign bonds generated solid profits as yields fell and prices rose in anticipation of the US Fed supporting the bond markets, and the economy, by slashing interest rates and introducing QE infinity.
His investment team sold down their allocation as 10-year US Treasury yields fell to 0.7 percent from 1.5 per cent in February. But, as yields moved back to 1.2 per cent, QSuper’s allocation rose again.
“Markets are so volatile; we have been adjusting our allocations over the last week,” Woodhouse said even as investors were forced to sell bonds even as liquidity in fixed income markets evaporated.
Since the GFC in 2008, the $113 billion Brisbane-based super fund has made a smaller allocation to stocks than other superannuation funds. It notably cut its exposure to global listed equities in half to 28 per cent while allocating more to sovereign bonds and unlisted assets.
Woodhouse said returns from the fund’s fixed interest portfolio have risen almost 20 per cent for the fiscal year to date which partially helped offset the fall in listed shares.
“There were two things benefitting our balanced fund,” he added. “We have half the allocation to listed shares than most other balanced funds have and we had very strong returns coming through from the bond portfolio.”
Twelve years on, the investment chief stressed that the strategy of investing in US treasuries and Australian government bonds is a hedge against market volatility rather than making a single big bet on bond yields. “The capital gain potential of low-yielding bonds was demonstrated in 2018 after which QSuper set a deliberate strategy to invest in assets which perform well during the volatile times we are seeing now,” he argued.
Woodhouse said the derivatives markets are still “fairly liquid” and most of QSuper’s recent trading activity has been done through derivatives.
Nevertheless, he conceded that there are extreme liquidity issues in the markets with some investors forced to sell out of their most liquid assets.
“Whenever I see markets that should be liquid not trading, it makes me wonder about the liquidity challenges that some super funds or institutional investors may have.”
All cashed up, QSuper, which is in the midst of a potential merger with Sunsuper to become Australia’s largest superannuation fund, is searching for opportunities that have arisen through the stock market meltdown.
Woodhouse is seeing the same market stresses that he saw at the time of the global financial crisis when liquidity was also at a premium.
QSuper, whose members are mostly public sector employees, currently holds about 21 per cent of its assets in cash, or cash equivalent, which allows it to seize investment opportunities.
“Our cashflows are strong and have been positive through the recent volatility,” Woodhouse said.
“We have had the need to use cash but overall liquidity is not affected.
“If you look at the liquidity in our fund today it is virtually identical to the liquidity had at mid-Feb”.
Queensland’s largest superannuation fund holds around 27 per cent in unlisted assets – a level that the investment chief is comfortable with at a time when valuations are being recast.
Woodhouse is trying to maintain a business-as-usual stance which is hard to do when asset owners are reeling from the Morrison government’s move to allow early access to super for people suffering financial hardship.
This is on top of a plunging Australian dollar that is forcing super funds to provide more collateral to cover hedges adding pressure on liquidity.
All collateral calls for QSuper have been comfortably met and the foreign currency exposure has boosted returns, he stated. When it comes to derivatives as equities have fallen, QSuper was forced to pay cash to fund margins but received more cash from the bond margins as bonds grew in value. “This smoothed out the liquidity demands as markets have sold off.”
The investment chief who does not see his investment strategy altering due to the coronavirus crisis is looking for bargains just as it did back in 2009 when it picked up Heathrow Airport and One Times Square in New York.
“Currently, we have nibbled away at the listed equities markets where we have these very steep pullbacks. The 10-12 per cent swing by the Dow in a day was a classic example. That’s a significant move so in which case we stepped in and bought – it just depends on where markets are at any point in time,” he said.
“This liquidity affords the investment team maximum agility to opportunistically attain or divest exposures to take advantage of price dislocations.”
Woodhouse said it is hard to tell what the impact of the current crisis will be. For instance, airports are seeing fewer passengers. “But it’s unclear how long this outbreak will last and that will determine the effects on long-term value. If it is going to be a more sustained and protracted event, I think you could see some of those valuation impacts being far more significant.”
Up until now, Queensland’s biggest super fund had no exposure to credit at all yet now that spreads have widened, he can see it as an asset class the fund would allocate to. We are getting many calls on the distressed side so we may have an opportunity to pick through a breakdown in markets and get a very attractive investment.”
Currently, QSuper’s balanced option has 31.5 per cent allocated to global equities.