This $46B Australian Fund Manager Is Seeking Refuge... in Brazil

  • QSuper buying Brazilian debt, inflation-linked bonds in U.S.
  • Veteran CIO says return outlook toughest he has ever seen

Australia’s third-largest pension fund is venturing further and further afield, joining others seeking refuge in places like Brazil amid the toughest investment outlook for global markets the firm has ever seen. 

Brad Holzberger, the 60-year old former army officer and chief money manager at QSuper Ltd., is buying Brazilian local currency bonds in addition to building positions in inflation-linked debt in the U.S., he said in an interview. For the first time since 2007, he’s dipping his toe back into credit, favoring swaps in credit spreads for his fund which invests about A$62 billion ($46 billion) in assets for Queensland government employees.

QSuper is cautioning that surging prices in everything from stocks to bonds and commodities last year have reduced the chance of strong investment returns in the years ahead. Higher-yielding bonds in emerging markets contrast with near-zero yields after inflation in advanced economies, attracting the likes of BlackRock Inc. and Amundi Asset Management. QSuper is debating whether to lower its targeted returns, which it’s already brought down to about 3.5 percent per year.

“Every asset in the world looks a poor risk-return trade-off to us,” Holzberger, QSuper’s chief investment officer, said in an interview by phone from Brisbane. “The outcomes in markets have been materially above what we would expect and that’s simply because we are pulling returns forward from the future. So, the natural and logical reaction is to lower your expectations.”

Emerging bonds are grabbing money managers’ attentions. Funds investing in developing-nations’ debt attracted almost $2 billion of new investments in the week ending Jan. 4, their biggest net inflow in three months, EPFR Global data show. Myles Bradshaw at Amundi Asset Management told Bloomberg this month he especially likes Brazilian bonds. BlackRock Inc., the world’s largest money manager, says developing-nation debt is in a strong position and sees a resumption of buyers flocking to these bonds.

Brazilian local currency debt has returned 4.2 percent over the past three months, topped only by Egypt in Bloomberg’s ranking of 34 countries. That compares with a 1.2 percent loss for a gauge of emerging-market dollar bonds.

Prospects for higher inflation are pushing the Australian pension fund to buy more inflation-linked debt, an asset in which Pacific Investment Management Co., or Pimco, has also found favor.

“Nobody likes the yields that they are buying these assets at today,” said Holzberger. “I would love to buy these assets at multiples of their real yields. But they’re just not available. So we’ve bought them with some trepidation.”