One of Australia’s largest pension funds plans to boost investments in private debt, concerned that stocks have rallied too far too fast and traditional bonds are offering meagre returns.
The Construction & Building Unions Superannuation is targeting loans for real estate developers and for infrastructure projects like airports that are offering high-single digit returns, according to the fund’s chief investment officer.
The year ahead “is going to be challenging,” Kristian Fok said in a phone interview, adding the fund remains cautious on the outlook for equity markets. Predicting where stocks go from here “is really difficult because it will be influenced by policy making, central bank responses and so forth.”
The Melbourne-based pension fund that manages A$54bn ($37bn) is set to seek out a small gain in the 12 months to June 30 after equities rebounded in recent months as governments worldwide step up spending to cushion the blow from the Covid-19 shutdown. The fund’s default investment option has more than half its portfolio allocated to Australian, global and emerging market stocks, according to its website.
To help generate returns, Fok is looking at private debt investments while shying away from cash and bonds amid record-low yields. It’s seeing “really interesting” opportunities, including lending to residential housing developers that aren’t reliant on offshore buyers and areas like airports that may need to refinance, Fok said.
The fund will also bring more of its investing in-house as it deploys capital in the debt strategy, and more than doubles its allocation for long-term bets on specific companies.
About 40% of the fund will be managed internally by the end of next year, from about 30% now, Fok said.
The in-house shift, which began in 2017, has so far paid off. The teams have added more than A$375mn worth of additional performance while costs as a percentage of assets have dropped by almost a third, Fok said. “It’s net returns that matter,” Fok said. “You couldn’t have wished for a better start.”
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