Super funds go ‘back to basics’, top up bonds: Equip’s Andrew Howard and Aware’s Damian Graham

Overseeing hundreds of billions of dollars, super funds are once again embracing portfolio diversification as the heat comes out of equity markets.

Super funds are going ‘back to basics’ and embracing portfolio diversification as the heat comes out of equity markets.

Super funds are going “back to basics” and embracing portfolio diversification as the heat comes out of equity markets, with other asset classes, including fixed income, now much more attractive as rates push higher.

Speaking at an Australian Institute of Superannuation Trustees’ investment conference, Equip Super chief investment officer Andrew Howard says the sharemarket ructions of recent days showed the need for a more diversified portfolio.

“For a long time we all just forgot about diversification and I think this is a reminder of the importance of it within your portfolio. (AT Equip) we’ve been going out and buying bonds, we haven’t done that for a while.

“But when you think about the fact that US yields are now hovering at levels they haven’t been for literally 10 years, with the Aussie at 4 per cent, that’s a real opportunity, and I think you do have to look at this market as an opportunity.”

The current environment provided a chance to reset portfolios he said, adding that investors needed to fully understand the risk in their holdings.

“Does that risk actually align with the conditions you have in the positions that you’re taking. For us, it’s just really about going back to basics. And I think it’s a good market to be able to do that.”

Speaking on the same panel discussion, Aware Super chief investment officer Damian Graham said his $150bn fund had taken positions on fixed income in recent months, describing the asset class as providing “near to medium-term opportunities”.

“We formed a view a number of months ago that interest rates were likely to go higher, inflation was going to start to move up. Looking at the options we should take to that, we defined that equities wasn’t an area that we felt was a high-quality decision.

“So we didn’t want to take a position on equities but we took a position on fixed income, some relative value positions in fixed income that have actually been quite positive.”

These were not long-term strategic changes but near to medium-term opportunities, Mr Graham added.

“We do try to have a longer term view from a strategic asset allocation (perspective) but fixed income does offer some value now.”

The boost from higher rates to cash and fixed income could see returns in 2023 being “okay”, even as economic growth weakens, he said.

Equities would still be the main driver of long-term returns, Mr Graham predicted, saying he saw opportunities ahead from the dislocation of asset prices.

“I want to make sure we’re able to take advantage of that (disclocation). And with a long-term mindset we believe we can create better long-term value and performance.”

Super funds are eyeing a negative performance for the financial year after a horror show on equities markets in June. It follows a stellar run up in 2021 that saw the best funds return around 20 per cent.

Even before markets plunged this week, research house SuperRatings was tipping a 2 per cent negative return for the year for balanced funds.

“If you look at it over a two-year period it’s still up about 10 per cent,” executive director Kirby Rappell said earlier in June.

It was “too early to tell” whether the share market rout would continue, or what it may mean for those looking to pull the trigger on their retirement, he added

“We’ve lived in a period where things have been moving up so consistently for so long,” he said.

“People are becoming more aware that there are both ups and downs in the market but it also reinforces the need to have the long-term views.”

Equip’s Mr Howard noted that some people may never have seen a negative full-year return in their super, as he cautioned members not to shift to cash due to the recent turbulence.

“We’ve inadvertently made it extraordinarily easy for our members to change and usually they do at the worst possible time,” he said.

“It’s about getting the message out there that this is a long-term investment. Yes it’s harder at the moment, we have to work harder to deliver returns for our members but we want to encourage members to actually call us, speak to one of our advisers so we can talk through it and they don’t just get on the website and switch out as many did at the beginning of the pandemic.”