Australian institutional investors are bucking a worldwide trend of investing outside the home market, according to Bank of New York Mellon Transition Management chief executive Mark Keleher.
Whereas superannuation schemes and defined benefit plans in most of the world are moving money away from their home markets and investing it overseas, Australian investors are selling their US and European assets and investing the proceeds in the Australian market, Keleher said.
“Australia’s one of the few markets in the world with a decent yield in terms of cash, so I think that makes it especially attractive. Why would an Australian entity hold US 10-year bonds yielding 2 per cent when you could go ahead and take on Australian risk?” he asked.
The attractive relative yield is coupled with the benefit of investing in the same currency in which the defined benefits scheme/superannuation fund will be paying its liabilities, Keleher added.
The downside of the significant ‘home bias’ in Australia is that it exposes investors to a fair amount of commodity risk, Keleher said – although he saw the chances of a hard landing in China and a subsequent decrease in demand for resources as unlikely.
The main challenge for institutional investors around the world is simultaneously hedging against different economic scenarios that could result in inflation risk, tail risk or deflation risk.
“That’s a scary proposition, to try and set up a portfolio that’s going to protect your pensioners in either scenario,” Keleher said.
There has also been a surge in interest for credit since the global financial crisis, and (unsurprisingly) a decrease in demand for sovereign debt, he said.
“Pre-crisis versus post-crisis there’s been a huge increase in demand for fixed interest and credit. Same thing for active international equities – demand is significantly up since 2009,” Keleher said.
