Moving away from aggregate or composite-bond portfolios that mix credit and sovereign debt to awarding specific mandates will give the $12.8 billion Government Employees Superannuation Board (GESB) greater control of its fixed income portfolio.

GESB recently announced $2.28 billion of new fixed-income mandates to three managers, and a wide-ranging restructure of its fixed-income portfolio.

Steve McKenna, acting chief investment officer at the Perth-based fund, says that splitting its fixed-income portfolio into global government bonds and global investment-grade bonds was a reaction to the some of the difficulties the fund experienced in 2007 with its credit exposures and would help manage current concerns around sovereign risk.

“In 2007, the way GESB had its fixed-income investments arranged was generally in aggregate and composite-bond portfolios that mixed sovereign debt and credit and what that meant was that it was in the managers’ ability to change the mix between sovereign and credit – not really a lever that we could pull at the GESB level,” he says.

McKenna says that the old aggregate-style portfolios limited the fund’s capacity to move considerably away from a manager’s benchmark when wanting to change the underlying mix of credit and sovereign debt.

“Back in 2007 it turned out credit was the issue and that was the thing you really wanted to avoid. Fast forward to 2011/12 and a lot of the problems are in sovereigns.”

McKenna, who as well as performing the role of acting-chief investment officer also develops strategies for GESB’s fixed income, alternatives and cash asset classes, says the new structure also attempts to deal with inherent flaws in bond indices.

It is widespread concern among fixed-income investors that market-cap-weighted bond indices tend to reward the biggest borrowers.

“The more money, for example, that Spain and Italy borrow, the larger that component becomes of this type of index,” McKenna says. “So, if our managers closely follow the benchmark, the larger our members and our funds will be exposed to that [the biggest debtors], and that is not clearly not a desirable place to be. So, while we created this structure really to deal with what was a credit issue back in 2007, it is going to help us with the sovereign debt issue in 2012.”

In its global bond portfolio GESB awarded Wellington Management Company $708 million and Franklin Templeton Investments $708 million.

Wellington also received $432 million to manage as part of the global investment-grade bond portfolio, along with Pimco Australia, which received $427 million to manage.

McKenna was appointed to the role as acting-chief investment officer in March after the February departure of Sharon Hicks.

The departure of Hicks comes as the latest change in senior management at the fund, with chief executive officer Howard Rosario starting in the role at the end of January.

McKenna says that the fund’s board was continuing its search for a chief investment officer and that no decision on the appointment had been made yet.