Investors warned against "value trap"

Gary Gabriel of Hesta says Australian super funds are assessing whether they should hold bonds to maturity, given that these instruments cannot now provide enough yield to match liabilities.
Investors warned against "value trap"

Avoiding what some have called the "value trap" has become a major headache for asset owners as they seek sustainable returns in a persistently low-yield world.

A lot of capital has been chasing unlisted assets as institutions have found it increasingly tough to match their liabilities. As such, this has added to portfolio risk, with demand driving up prices.

Gary Gabriel, general manager of portfolio strategy and risk at Australian superannuation fund Hesta, said super funds were now assessing whether it was realistic to hold bonds to maturity, given that such instruments no longer provide sufficient yield to match liabilities.

Speaking on a panel at AsianInvestor's seventh annual Southeast Asian Investment Forum in Singapore, he noted there was value in growth assets but pitfalls for the unwary, with some markets cheap for a reason.

“It’s important to have a view on what fair value is in the market, being grounded and accepting assets on the basis of what they can realistically deliver, rather than falling into the value trap,” he said.

Garry Hawker, Hong Kong-based partner at investment consultancy Mercer, made the point that investors would have to think again about their likely returns over a given period. He said investors needed to accept they would not enjoy the returns they had become used to over the past 15 years. 

“If bond yields are going to remain very low, there’s a degree of recalculation that needs to be done, and in a sustainable context a re-assessment of likely returns against your time-horizon,” he noted.

The panellists acknowledged that a lot of capital was chasing unlisted assets. “While we like the nature of the opportunity in real assets, there is not much value to be had,” said Hawker. “Investors may get the cash flow they expect, but they will pay a lot for it.”

But Gabriel said he saw a role for alternative assets and volatility strategies in helping to generate sustainable returns. “We see alternative assets playing an integral part of our long-term investment view,” he noted.

He also suggested there was an element of crossover between sustainability of returns and sustainability from an environmental context.

“We think an ESG [environment social and governance] element to the investment process contributes to sustainable returns,” he stated. “It’s still a question of scale though, in terms of access, efficiency of pricing and implementation.”

Hawker said the pressure for consistently positive short-term returns worked against the rapid development of sustainable investment thinking, with too much focus on quarterly earnings. “Our challenge is quite simply about encouraging clients to think longer term,” he reflected.

Where investors allocate to industries and sectors that directly impact the local environment – such as alternative energy – their decisions are based on a need to generate sustainable returns.

However, increasingly they will be determined by their social impact. The panellists said this was already the case in Australia and was likely to become more widespread in Asia over time.

Gabriel said it was important to be aware of such themes and dynamics when trying to be a smart investor. “There are opportunities to make better returns outside of a static vision of portfolio allocation,” he noted.

The panellists agreed that the data-set available now was deeper than it had ever been, giving long-term investors more opportunities to find trends within that.

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