Australia’s LGIA Super, the retirement fund for Queensland government staff, is eyeing direct exposure to mainland Chinese securities, especially bonds, and a broader real asset portfolio that includes US infrastructure and more private credit investments.
“We don’t have a standalone allocation to onshore Chinese securities yet, but we would like one when the time is right,” recently appointed chief investment officer Troy Rieck told AsianInvestor.
He added that, as with the US and other developed markets, a dedicated China exposure could be justified, since the country is now such a large component of emerging market indices.
China as an allocation in international investment portfolios is rising after global index providers such as MSCI increased the country's weighting in key benchmarks. The country is also drawing more foreign institutional interest after it removed restrictions for overseas investors to own securities firms and mutual fund houses from April 1, allowing access to its $45 trillion finance sector.
Rieck sees the Chinese stock market as a “fertile hunting ground for a quantitative process”, as it is relatively under-developed in respect of active management and has a high level of retail investor participation.
He views Chinese bonds as particularly important for portfolio diversification. They represent “one of the largest uncorrelated asset classes left in the world, and they are dramatically under-owned in the West”, he said.
Rieck is also helping to oversee other recent changes to LGIA Super's portfolio approach, such as the introduction of an overlay programme and establishment of an investment operations team.
PRIVATE CREDIT PUSH
Another key focus area for the A$13 billion ($8.4 billion) fund is private markets, especially real assets. They can help dampen fund drawdowns and volatility during market turbulence and distress, said Rieck.
“We think that the illiquid asset programme brings many benefits,” he added, “and we’re now going to extend it [further] into other areas, including private credit.
“We haven’t allocated yet, but we’re close,” said Rick. The fund is selecting managers for a domestic private credit mandate with the help of consultancy Jana Investment Advisors. The superannuation fund aims to invest between $100 million and $200 million into the new portfolio, but Rieck declined to say how many firms it was looking to hire.
LGIA Super already has exposure to private credit both locally and overseas, but is now looking to hand out a mandate with a focus on lending opportunities in Australia and New Zealand. The task for managers is "find the best opportunities in a post-coronavirus world", Rieck said.
With economies convulsed by Covid-19 and businesses in dire need of capital, now would seem a sensible time to help provide financing.
The portfolio complements and extends the fund's alternative credit exposure in real estate and infrastructure debt, emerging market credit, regulatory capital relief and bank loans, Rieck said.
“The investment thesis is that the private credit market is relatively underdeveloped [as compared to the US, for instance],” Rieck explained. “There are a small number of [private] credit managers [in Australia], so you may be able to find an information advantage, and you may find your capital is valued by companies … in Australia and New Zealand.”
Indeed, private credit has been a big expansion area for many institutional investors in Asia Pacific and elsewhere in recent years.
When it comes to real assets, Rieck favours infrastructure and has lowered his yield expectations. “Infrastructure doesn’t have to generate 12% to 15% per annum to make sense,” he said. “In a low-return world, 7% to 8% after fees is OK.”
LGIA Super owns domestic and foreign infrastructure through value-add funds run by firms such as Antin, EQT, Equis, I Squared and Morgan Stanley. This includes exposure to assets in Asia's emerging markets.
“But the 800-pound gorilla is US infrastructure; that’s the one we’re all waiting for,” Rieck said. ”It would be a fantastic opportunity if America were to embrace the privatisation concept.
“The US is reluctant to join the party, but I’m hoping they send out invitations sometime soon and make it a three-day bender,” he added. “America needs infrastructure spending, the world likes the rule of law, and they want to generate a suitable return without taking on excessive risk.”
Such capital is badly needed. The US will underinvest in its domestic infrastructure by over $2 trillion between 2016 and 2025, according to a report published in January by the American Society of Civil Engineers. Moreover, the country spends 2.5% of GDP on the sector now, down from 4.2% in the 1930s, the ASCE added.
“Closing this infrastructure funding gap is imperative and requires investment from all levels of government and the private sector,” the report said.
In the meantime, LGIA Super would also like to buy more core infrastructure closer to home, Rieck said, “but prices are high right now”. The fund’s Australian exposure includes a $500 million mandate with Palisade and social infrastructure exposure via Melbourne-based Lighthouse.