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First State Super, Hostplus and BT on cash allocations

Amanda White




First State Super favours a high cash allocation in order to opportunistically invest in volatile markets and add value to the portfolio.

The fund has a strategic allocation of 10 per cent to cash which has increased over the past couple of years.

Michael Blayney, head of investment strategy at First State Super, said investors need to have discipline and execution capabilities to be able to deploy this type of strategy.

“As an investor, I have always thought intuitively if you have an allocation to cash, you can deploy that during periods of market stress for excess return,” he said.

“If you are going to deploy cash tactically, you want bang for your buck, which means volatile investment classes.”

First State Super has clear delegation authority which allows them to be tactical.

Meanwhile Greg Clerk, head of investment strategy at Hostplus, said his fund holds no bonds and no cash. This is due primarily to the fact 88 per cent of members are younger than 45 and truly have a long term timeframe.

“Cash at 1.75 per cent is not a retirement outcome for our members. The opportunity cost is stark in that environment.”

Hostplus does have a liquid defensives allocation, but it is mostly allocated to hedge funds.

In a separate session, head of fixed income at BT Investment Management, Vimal Gor, is favouring cash and told delegates that all asset classes are overvalued.

“The issue I have, is the return expectations going forward look stretched,” he said. “I personally think all asset classes are overvalued. Cash is a good starting point right now.”

He expects that volatility will increase, and said in a world of slow growth with over-valued assets, to keep away from all asset classes that could have a negative tail event.

“And keep away from assets that are illiquid, that’s my main problem with credit,” he said.

“Now the world economy [is] slowing, and defaults picking up. This is not an environment where you should increase allocations to credit. You should be allocating back into cash.”

“Slowing growth as a backdrop for over-valued assets – why I want to be in cash. It’s the wrong time to be pushing up the yield curve, I don’t want to be risking capital.”

“I can see all the pieces falling into place for a very big bear market in bonds,” he said.

“People are buying bonds because they are forced to buy bonds, central banks are forcing yields down. Yield curves are flattening, so you’re not being paid the same level to take risks. We probably need a last hurrah before the bond game is over, but total debt levels [are] way too high for any central bank to allow bond yields to rise.”