AustralianSuper chief investment officer and deputy chief executive, Mark Delaney, says bonds provide a diversification benefit but not as much as in the past because now yields are so low.
Speaking at a Bloomberg investment webinar last week, Delaney said: “We will be looking for other sources of diversification. Those might include unlisted assets, currency and hedge strategies.”
Delaney says AustralianSuper’s portfolios are holding much more cash than they would typically hold. “We will dribble money into credit and some unlisted opportunities,” he says.
“We are underweight fixed income. We think that if the recovery takes hold bond rates will rise. It will not be much, because of central bank buying, but there is not much prospect of capital gains from bonds.”
Another speaker at the webinar, co-head of Asia-Pacific portfolio management at PIMCO, Robert Mead, challenged this thinking, saying: “It is very clear that no matter what the level of bond yields may be, when things go awry bonds turn out to be defensive every time. Owning some of that defence is an important key ingredient in a diversified portfolio.
“Even if rates move into negative territory there will still be the ability for bond markets to generate positive returns,” Mead says.
Over the six months to the end of May, the Australian fixed income index, the Bloomberg AusBond Composite, rose 1.5 per cent, and the international fixed income index, the BarCap Global Aggregate, rose 2.8 per cent.
Over the same period, the S&P/ASX 200 Index was down 14.6 per cent and the MSCI World ex-Australia Index was down 3.3 per cent.
Both Mead and the head of bond, income and defensive strategies at Pendal Group, Vimal Gor, said that given central bank support for corporate credit issuers, investors could leverage their fixed income portfolios with more exposure to high quality credit and even some high-yield credit without taking on excessive risk.
Last week the US Federal Reserve said it would begin purchasing individual corporate bonds, in addition to its policy of buying corporate bonds through ETFs.
“Markets are being driven by government policy,” Gor says.
Other asset classes that are often used for diversification, including infrastructure and REITS, have performed poorly this year. With the Australian A-REIT Index down 23.4 per cent over the six months to the end of May, global REITS down 25.9 per cent and global infrastructure down 16.4 per cent.