Australian bonds an alternative to UK gilts – Kames Capital
GLOBAL - UK pension funds seeking alternative ways of hedging against inflation could seek exposure to Australian index-linked bonds, Kames Capital has argued.
The suggestion comes as research by consultancy PwC found that future inflation rates were being overestimated, leading to sponsors committing as much as £50bn (€57.3bn) in unnecessary funding commitments to UK defined benefit (DB) schemes.
Speaking at the Local Government Pension Investment Forum in London, Kames' head of multi-asset investing Scott Jamieson displayed a graph showing that the UK's consumer prices index (CPI) had risen at almost precisely at the same rate at Australia's retail prices index (RPI) since 1978.
He suggested inflation-linked bonds issued by the country's federal Treasury could therefore be used by UK schemes to hedge against price increases.
Jamieson joked: "We are the same English-speaking, beer-swilling, hedonistic consumers the Australians are."
Explaining the current benefits, he noted that while real UK gilt yields offered a negative return of 0.3%, Australian bonds offered 1.76% as of August.
Discussing how UK pension funds could "survive" inflation, he suggested that, if schemes were interested in alternative ways of safeguarding against it, then commodity investments would be a potential way of gaining exposure to the "front end" of price increases.
Jamieson described infrastructure as a "fad", but admitted that the advantage of locking in the illiquidity premium, as well as exposure to an inflation-linked investment were important for pension funds.
However, he seemed wary of the infrastructure industry and said: "There just seems to be more managers than investors."
He added that while there was a place for property in portfolios, he was cautious about the pressures placed on leases by the market environment.
Consultancy PwC meanwhile claimed that RPI inflation rates had been "consistently overstated" by 1%, when comparing the measure of market-implied inflation, on which projections for pension funds were based, to the actual rate of inflation.
Raj Mody, head of PwC's pension practice, stressed the importance of possessing an accurate picture of scheme deficits, especially as these widened due to the stock market "doldrums".
"While pension schemes tend to make a small deduction to market-derived inflation models, say up to 0.25% per annum, our analysis suggests this still leaves a significant overstatement in likely pension scheme liability values," he said.