I don't think anyone has written more about this publicly than yours truly, but it is certainly gratifying to see the AFR echo the same sentiments today (via the excellent Mark Bayley):
"[U]nless the government changes tack and gets actively involved rather than allowing another “industry solution” then we will be still left with our twin national disgraces – an undernourished corporate bond market and an incredibly equity-biased asset allocation...
As I wrote in my previous article, there are far too many vested interests to maintain the unsavoury status quo of equity-biased super funds and offshore corporate issuance. I usually do not advocate government involvement but in this instance it is the only solution that I can envisage. Furthermore, in this instance it would help to solve a big and growing infrastructure funding problem.
One of the blatantly obvious outcomes from the December meeting is that Australia is in drastic need of some education about how to measure investing returns generally and those in fixed income specifically...
There is very little knowledge of, and no attempt to look at, returns on a risk-adjusted basis; in Australian the quest for the highest absolute return is completely blind to the level of risk taken to achieve that return...
This basic misunderstanding starts at the top. The Treasurer, Wayne Swan, was quoted after the December meeting as saying: “Investors do not seem attracted by the pricing of bonds, relative to returns they get on other investment classes, particularly equities.” Well that’s because they need some guidance from a government about risk-adjusted returns and what should constitute a balanced portfolio at the various stages of the life cycle and at different points on the risk spectrum.
But even CIO’s of super funds appear to have the same misconceptions about bonds, saying in the Financial Review that “they’re too expensive for us to add to the exposure, and if the environment were to improve, we would probably look to reduce that even a little bit further”. That comment again fails to take into account any attempt to adjust those returns for risk and from a super fund that has only 5 per cent of its portfolio in bonds, more than a little scary. Remember the norm in Europe is for balanced portfolios to invest anywhere north of 40 per cent in fixed income.
Another CIO was quoted in the Financial Review as saying, “if you think about that in terms of a price to earnings ratio, 10-year government bonds are currently trading on a 27 times P/E with no prospect of any increase in the earnings. And people are finding it difficult to justify paying 10 times P/E for a share.”
Again within that comment there is no risk versus return debate; you know that the Australian government is a safer investment over 10-years than any Australian corporate’s debt or equity, so you would expect the return to be lower. Furthermore, I know what the CIO is trying to say but I’ve never heard of a P/E ratio being applied to bonds before; but hey, what do I know I’ve only been doing fixed income for 15 years.
As this government is leaving it up to individuals to decide their own super investment strategy, what I would implore you all to do for a financial New Year’s resolution is to check what assets your super fund is invested in – it’s no good just finding out it’s in the default or balanced fund; you need to know the exact percentage that is invested in equities versus fixed income.
If it’s a substantial portion in equities, speak with your financial advisor to reaffirm that is the correct strategy for your stage in the life cycle and appetite for risk. If not, it could be your most important financial decision this year."
