By Lewis Jackson
SYDNEY (Reuters) - Australia's A$2.4 trillion ($1.54 trillion) pension sector grew its investments in local and foreign debt by more than A$20 billion over the past year as higher yields burnished an asset class overlooked in a country where equities traditionally rule.
The two largest pension funds grew fixed income investments in their primary vehicles, holding bulk of the pensions, in the last financial year. For the A$300 billion AustralianSuper, the country's largest fund, its fixed income allocation hit the highest level since at least 2013.
AustralianSuper told Reuters it had doubled debt assets to A$40 billion over the past year and added at least three new fixed income portfolio managers to its London office.
"We had a very low allocation to fixed interest for much of the last two or three years and are now building that back up again as rates start to normalise," said Katie Dean, head of fixed income, currency and cash at AustralianSuper.
Australian Retirement Trust, which manages A$240 billion, Sio lifted its fixed income allocation to 13.7% from 12.5%, according to filings.
The rotation into bonds is a step change for a sector long underweight the asset class by global standards. Norway's $1.4 trillion sovereign wealth fund and the $450 billion California public employees pension fund CalPERS hold about a quarter of assets in fixed income, for instance.
Australian investors have historically preferred stocks to bonds, in part due to dividend friendly tax laws since the 1980s that enhance income from stocks.
The decline in global yields after the 2008 financial crisis also sapped appetite for debt.
Australian government 10-year bond yields had dropped to around 1% in 2020 before the pandemic, from 6% in 2007. They are now above 4%.
"There's a huge market bias in Australia... it's ridiculous for an OECD country," said Amy Xie Patrick, head of income strategies at Pendal Group, which manages pension money.
Jay Sivapalan, head of Australian Fixed Interest at Janus Henderson, which manages money for local pension funds, said their past investments were mostly in private debt markets where yields come with a liquidity premium.
But the spectacular rise in benchmark sovereign yields since late 2020 is luring funds back to public markets, said Sivapalan.
Even funds reluctant to permanently change allocations to debt are trading bonds. Fixed income has been Aware Super's most actively traded asset class over the past few years, says its Head of Investment Strategy Michael Winchester.
The A$160 billion fund has roughly a tenth of its primary vehicle invested in fixed interest, according to its website.
In another sign of the sector's tentative embrace of fixed income, the country's fifth largest fund, the A$100 billion Hostplus, added debt in fiscal 2022 to its primary vehicle for the first time in five years, but the allocation was only 3%.
"Within the last year to 18 months, they've [the sector] been trying to get to some sort of neutral," said Patrick. "They're not necessarily going over their skis on fixed income."
($1 = 1.5584 Australian dollars)