The $410 billion AustralianSuper has been dialling back its fixed income allocation in favour of growth assets as it positions for a “constructive” economic environment, but the asset class remains a critical portfolio stabiliser and an important tool in complementing the fund’s risk objectives.

The fixed income and currency portfolio currently sits at more than $40 billion or roughly 10 per cent of AustralianSuper’s assets under management – down from its peak allocation of roughly 20 per cent in 2023.

“We like to sit a little bit underweight fixed income versus our growth asset allocation across the fund,” AustralianSuper head of fixed income and currency Katie Dean tells Investment Magazine. “We do think that whilst markets are generally pretty fairly priced, notwithstanding the global volatility around geopolitics, the broader economic outlook for most of the large economies, particularly the US, is pretty constructive.”

“We’ve got interest rates at around neutral. We’ve got unemployment rates around the world still quite low, and we’ve also got a fiscal policy impulse coming through a lot of the major economies over the next 12 months to two years.

“That combination is quite constructive for economic growth and also for growth assets such as equities, infrastructure and private equity.”

Dean leads a 30-person-strong fixed income and currency team across the Australian and London offices, which manages 58 per cent of that portfolio internally. An allocation to Australia makes up over half (55 per cent) of the portfolio, followed by North America (25 per cent) and UK/Europe (16 per cent).

It actively manages duration, FX and spread exposures through physical and derivative instruments. One benefit that comes with the extensive in-house capability is that the fund can fine-tune those elements “very quickly and fairly precisely”, which is a significant competitive advantage, says Dean.

“We run so much of that risk internally, it does allow us to be quite agile and really work those levers hard, whether it be adjusting duration outright, adjusting duration for particular countries or particular parts of curves – we’re active almost every day,” she says.

Another plus of the internal team is that it enables “an open approach to all levels of the capital structure across debt markets”, Dean says. For example, the majority of the fund’s global government bonds are internally managed which allows it to tap into more interesting issuance opportunities, which might not be so readily available to smaller funds internally or at a low cost.

In private markets, scale means access to the best partners and more co-investment opportunities, which primarily arise from private credit.

“The investment case [of private] versus the public market does need to be made, because we don’t want to lock up our liquidity unnecessarily,” she says.

“We do have some allocations to private markets across both investment grade and sub investment grade [bonds]… but it’s those co-investment opportunities that can provide a unique source of return and diversification that we certainly would struggle to access at an affordable price for our members without having the internal capability.”

Risk toolkit

Within different premixed investment options, Dean says fixed income serves a different portfolio purpose. In its MySuper balanced option, which captures 85 per cent of member accounts or 62 per cent of assets*, fixed income serves as a liquidity source, an alpha generator and a potentially defensive tool. But in stable or conservative options, the goal is to secure above-inflation returns for those older members.

On the cash front, the allocation is sitting at a “neutral” 6 per cent and the fund wants to stay away from a meaningful overweight in cash, Dean says. But it has been favouring holding more cash relative to fixed income in the past year because of the potential for bonds to underperform cash in a rising inflation or rising term-premium environment.

AustralianSuper hired its first chief liquidity officer in 2024, appointing former Commonwealth Bank executive Chandu Bhindi.

“With interest rates close to their troughs, or that central banks have been close to the end of their easing cycle, the combination of a bit of fiscal largesse across some of the major economies does suggest that curves should stay relatively steep,” she says.

Most of the currency management is also done by AustralianSuper’s in-house team, which in Dean’s view is a huge advantage as it enables the fund to understand exposures and risk fast in a rapidly moving currency market.

“What we’re really focused on is ensuring that we’re not misallocating risk across our currency book. In other words, we want to try to make sure that we are avoiding the really large tail risks and therefore taking appropriately sized positions across our active currency portfolios,” she says, adding that these are risks like unpredictable geopolitical events such as the recent conflict in Iran.

“[De-dollarisation] is something that we always are watching. But I think what we’ve seen over the last week where the US dollar appreciated in response to a risk-off event tells you that the de-dollarisation theme has potentially been overplayed in the news relative to actual portfolios.”

*Based on calculations from the Conexus Institute from APRA data. The Conexus Institute is a not-for-profit think tank philanthropically funded by Conexus Financial, publisher of Investment Magazine.