Future Fund aims at debt
Australia's $200 billion sovereign wealth fund is directing more capital into high-grade corporate debt.
As global interest rates rise, the Future Fund has significantly increased its allocation to investment-grade credit, according to CEO Raphael Arndt.
Over the past year, the Future Fund has doubled its exposure to domestic corporate debt, now standing at $1 billion.
This move comes as returns within this asset class reach their highest levels in 15 years, making it a compelling option for investors.
Arndt has highlighted the attractiveness of high-grade debt, claiming that it currently offers yields ranging from 7 to 9 per cent, a level not seen since the financial crisis. In comparison, equities fail to match this risk-adjusted appeal.
Investors participate in corporate debt through instruments like bonds traded in the market or direct loans. They earn profits by receiving interest rates, typically exceeding the risk-free bond rate. The interest rate's spread over the risk-free rate corresponds to the perceived risk of the investment.
Former Prime Minister Paul Keating has endorsed the shift towards fixed-income investments, citing compelling economic reasons.
As Australians age and factors such as demographics, inflation, and higher interest rates come into play, corporate debt and fixed income are gaining prominence in future portfolios.
AustralianSuper, the nation's largest super fund with $300 billion in assets, has also increased its investment in fixed income, now constituting approximately 18 percent of its portfolio.
Chief Executive Paul Schroder expressed a desire to invest in long-term corporate debt, provided the market evolves to facilitate such investments, emphasising the need for cooperation between various financial institutions.
Cath Bowtell, chair of IFM Investors, a $215 billion asset manager owned by industry super funds, noted the growing interest among pension funds in private corporate debt.
However, she highlighted the constraints posed by regulatory settings and benchmarking, which can limit a portfolio's flexibility.