Australia’s biggest pension fund braces for a prolonged slowdown

This article was written by Benjamin Robertson and Silas Brown. It appeared first on the Bloomberg Terminal.

Australia’s largest pension fund sees the global economy struggling for about two more years as businesses and households adjust to tighter monetary and fiscal policies.

Investors have been conditioned to think that market pullbacks are a short-term phenomenon but the current crisis is different, according to Mark Delaney, chief investment officer of the A$260 billion ($175 billion) pension giant AustralianSuper Pty.

“It takes 12 months to two years for tighter monetary policy to impact on the economy — and monetary policy is just getting tight now,” Delaney said in an interview with Bloomberg in London. “That would tell you that the downturn is coming in 18 months time.”

AustralianSuper this month posted its first annual loss since the global financial crisis as rising inflation, geopolitical tensions and fears of an economic slowdown roiled markets. To help curb the impact, the Melbourne-based institution has been increasing its exposure to government bonds, and pulling back from deploying money in private markets while valuations stabilize.

60/40 Debate

Delaney said the traditional 60/40 or 70/30 portfolio structure for weighting equities and bonds remains sound, “but you want to have more inflation protection in your portfolio than you’ve run in the last 15 years.”

“So things like real assets and some commodities will be handy for that environment,” he said.

The fund has increased its holdings of government bonds from around 5.9% to 10%, Delaney said.

He believes the withdrawal of fiscal stimulus after Covid is responsible for the current downturn, which has seen the MSCI World Index fall around 20% since the start of the year.

“Central banks gave free money just when supply-side shocks occurred during Covid, and the combination of all three proved to be quite combustible,” he said.

Private markets funds are changing hands at deep discounts in the secondaries market as investors unload assets they fear might fall further.

In the biggest transaction of its kind, California Public Employees’ Retirement System in recent weeks wrapped up the sale of about $6 billion of its stakes in private equity funds to second-hand buyers at an average 10% discount to a September valuation, Bloomberg reported.

Global Hiring

AustralianSuper still has big plans for a global expansion, and is looking to hire staff internationally in its hubs in New York and London, and aims to open a second office in Asia after Beijing. It expects assets under management to almost double in five years to A$500 billion.

That global ambition means adjusting remunerations packages to attract top talent from other asset managers. “We’ve had to change our practices to be fit for purpose and the size,” Delaney said. “That’s just inevitably part of what we have to do as we go global.”

While the global financial crisis prompted a reexamination of the financial industry, the current economic crisis should bring more scrutiny over the role of the central banks in printing money, according to Delaney.

“You have to understand that any increase in value during the Covid period was illusory, it was fueled by free money — it was not real,” he said. “It massively inflated all the asset prices.”