Australia’s $1.5 Trillion Pension Sector Returns to Debt Investments, Reports Reuters

By Lewis Jackson

SYDNEY (Reuters) – Australia’s A$2.4 trillion ($1.54 trillion) pension sector has increased its investments in both local and foreign debt by over A$20 billion in the past year. This shift highlights the growing appeal of fixed income assets in a market that has traditionally favored equities.

The two largest pension funds in Australia have significantly expanded their fixed income investments. The A$300 billion AustralianSuper, the nation’s largest fund, saw its fixed income allocation rise to the highest level since at least 2013.

AustralianSuper reported that it had doubled its debt assets to A$40 billion over the past year and brought on at least three new fixed income portfolio managers to its London office.

Katie Dean, AustralianSuper’s head of fixed income, currency, and cash, noted, "We had a very low allocation to fixed interest for much of the last two or three years and are now building that back up again as rates start to normalize."

Similarly, the Australian Retirement Trust, managing A$240 billion, increased its fixed income allocation to 13.7% from 12.5%, based on regulatory filings.

This rotation into bonds marks a significant shift for a sector that has been historically underweight in fixed income compared to global standards. For example, Norway’s $1.4 trillion sovereign wealth fund and California’s $450 billion public employees pension fund allocate around a quarter of their assets to fixed income.

Traditionally, Australian investors have favored stocks over bonds, partly due to favorable tax treatments on dividends that have been in place since the 1980s, enhancing equity income.

Additionally, the decline in global yields following the 2008 financial crisis diminished interest in debt. For instance, Australian government 10-year bond yields fell to around 1% in 2020, down from 6% in 2007, but have now risen above 4%.

"There’s a huge market bias in Australia… it’s quite unusual for an OECD country," remarked Amy Xie Patrick, head of income strategies at Pendal Group, which manages pension funds.

Jay Sivapalan, who leads Australian Fixed Interest at Janus Henderson, noted that previous investments were primarily in private debt markets where yields are typically accompanied by a liquidity premium. However, he indicated that the sharp increase in benchmark sovereign yields since late 2020 is attracting funds back to public markets.

Even pension funds hesitant to make permanent changes to their debt allocations are actively trading bonds. According to Michael Winchester, Head of Investment Strategy at Aware Super, fixed income has been the most actively traded asset class in recent years. The A$160 billion fund allocates roughly 10% of its primary vehicle to fixed interest.

In another indication of the sector’s gradual acceptance of fixed income, the A$100 billion Hostplus, the fifth largest fund in the country, included debt in its primary vehicle for the first time in five years during the fiscal year 2022, albeit with a modest allocation of only 3%.

"Within the last year to 18 months, they’ve [the sector] been trying to reach some sort of neutral stance," Patrick noted. "They’re not necessarily overcommitting to fixed income."