Super funds need to up EM exposure, Aviva Investors says

Australian superannuation funds will have to move more towards investments in emerging market (EM) debt and currencies if they are to achieve their desired returns, Aviva Investors has said.

Stuart Ritson, head of Asian rates and FX portfolio manager, emerging markets debt, at Aviva Investors, said when looking at the yields available on either Australian or global government bonds, by the time you took away inflation the expected returns on these instruments was close to zero.

“Really, when you think about the potential structure of these portfolios going forward, they (super funds) will probably have to increasingly move towards these types of investment opportunities (EM debt and currency) to generate the types of returns that they require,” he said.

Ritson said when looking at the real yields available on emerging market local currency bonds, they were typically close to a 3.5 per cent real expected return, which was almost 300 basis points above that of a 10-year Australian government bond.

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“So, you can sort of get the sense that ultimately, going forward, this is likely to be an increasingly important part of these portfolios,” he said.

Ritson said while allocations to EM debt were very low, Australia was not alone. Even though Europe was at the forefront when it came to EM debt allocations vis á vis the rest of the world, it was still vastly under-allocated, he said.

Reasons behind this could include a lack of understanding or appreciation of emerging market instruments, or issues surrounding the ability to access these markets.

“This is not going to be corrected tomorrow obviously – but this is going to be a theme which plays out over many years and it’s hard to imagine if we are sitting down in 10 years’ time that those allocations haven’t increased massively, if for no other reason than EM economies are growing a lot faster than DM (developed markets) … naturally you’ll have more investments into EM, basically,” Ritson said.