AMP Super is set to increase its private debt and overall credit exposure as the retail fund embarks on a strategic asset allocation review in the next few months.
Addressing the rising concern among global institutional investors that the current private credit boom might be deceiving, AMP’s portfolio management head Stuart Eliot says the asset class is “definitely not a bubble” and still offers attractive opportunities.
Eliot was hired by AMP in 2022 to oversee portfolio construction and asset allocation for its multi-asset group (MAG), which was transferred from AMP Capital to AMP’s wealth management business and created a unified AMP Investments team, headed by CIO Anna Shelley.
While MAG also invests for AMP’s institutional clients, the biggest part of its operations is managing the wealth giant’s $50 billion super assets.
In an interview with Investment Magazine, Eliot says the fund is in the midst of increasing its credit allocation, which is being funded by reducing hedge fund exposure, in line with the rest of the super industry.
“At the moment we’re overweight in investment grade credit and underweight in the so-called diversified credit spectrum, like high yield, securitised and EMD [emerging market debt]. And we are looking to rotate into the latter,” he says.
“We have some Australian high-grade private debt, with some underlying LBO [leveraged buyout] stuff, but it’s all Australian domicile. That has done very well for us.
“We are in the process of funding an international private debt strategy, and that will be a combination of credit risk sharing – very short-term loans to high-grade corporates – and also more of an opportunistic strategy.”
“We’re looking for 10 to 12 per cent return out of that [credit] part of the portfolio.”
Bubbleless
Private debt has received a lot of love from pension investors recently. However, global investment executives like UBS chair Colm Kelleher described the asset class as being in a bubble and is one trigger away from becoming “a fiduciary crisis”, telling a Financial Times conference in London last year.
Locally, mega-fund AustralianSuper increased its mandate with specialist private debt manager Churchill to $2.3 billion in 2023 but is starting to become cautious with the asset class as well. AustralianSuper’s fixed income head Katie Dean told Bloomberg that it is not actively increasing the private debt allocation anymore because the fund “hasn’t really seen the impact to the real economy and to some of these businesses from substantially higher interest rates”.
Eliot disagrees, however.
“It’s [private debt] definitely not a bubble. If you look at the definition of a bubble, it’s one way of saying that you can’t come up with a credible story that justifies the valuation,” he says.
“We’re still getting attractive spreads – the high-quality stuff you can get cash plus 4 per cent.
“If you’re doing private debt at cash plus 1 per cent, I’d say that’s a bubble. But the economics are still there to justify the long-term risks of that kind of investment.”
He says private debt will be a growth area as the economy continues to evolve, and as banks around the world shift more towards property mortgage lending and less towards corporate lending.
“Banks also have capital requirements because they tend to operate in a leveraged way, and it makes it more expensive or prohibitive for them to lend to companies,” Eliot says.
“Whereas the way that we operate as unleveraged investors is we look for an appropriate return for the risk we’re taking and for a balanced and well-diversified portfolio. Private debt just slots in really nicely.
“Banks stepping away from that space because of regulatory pressure is really good for super investors.”
Changing the glide path
The 11-plus per cent return delivered across three younger cohorts out of the five AMP MySuper funds in the 2023 calendar year was a pleasing result for Eliot, but he says “it’s hard to imagine that quantum of return year in and year out”.
“In these funds we’re targeting a return in the CPI plus 3 to 4 per cent range, net of fees and tax,” he says.
“We assume that CPI actually returns to the middle of the RBA’s target band and you’re looking at a 5.5 to 6.5 per cent net [return], which is pretty decent return in the long run to grow capital in the ways you need to build a retirement nest egg.”
Eliot says the retail fund is “tweaking the glide path” of its lifecycle products to gradually increase older cohorts’ exposure to growth assets, but it’ll only be a difference of “a few per cent”.
In terms of equities, AMP Super is looking to tilt slightly underweight emerging markets and slightly overweight developed markets, he says. The fund is “neutral” on Australian shares.
“We don’t hate it, but we don’t love it,” he says.
“Australia’s shares are relatively challenged… our largest trading partner is going through a rough time at the moment, so I think that’s probably one of the reasons our market is lagging. We’re just full of old economy sectors.”
The Investment Magazine Private Credit Forum will be held at Capella Sydney on 30 April.
