IPE AWARDS - European sovereign debt bought by the European Central Bank (ECB) or the International Monetary Fund (IMF) will have to be offloaded at one point or another, and this could be interesting for pension funds, Amin Rajan, chief executive at CREATE-Research, told IPE after his presentation at the IPE Awards in Brussels.
In his company's latest survey, pension funds had questioned the value financial innovations might have added to their portfolios.
He said he could see Japanese, German or Dutch pension funds in search for returns turning toward re-packaged European sovereign debt.
"They could hold it to maturity and collect on the illiquidity premium," Rajan said.
For him, it is simply a question of time before the ECB, IMF or whoever buys European debt must offload it onto the market again.
The opportunity for pension funds lies in the fact that, in a downward market, "a lot of things get thrown out as junk that are not necessarily junk".
Asked whether regulation might keep pension funds from buying such re-packaged junk bonds, Rajan pointed to constant changes in this sector, especially in the Asian markets, where ceilings on certain asset classes have been loosened in recent years.
However, he conceded that, "if pension funds have to adhere to a Solvency II-like regime, then it would be difficult for them to invest in such instruments".
As for risk aversion, he stressed that pension funds would have to increase their risk appetite to generate returns in the current market.
"Return opportunities will be few and far between while the current crisis is being resolved, and this might take another 5-10 years," Rajan said.
He added that money could only be made in market dislocations and that the next opportunities for that would be in the credit sector, especially in sovereign debt.
"Those pension funds that made money in the past are those that bought in a dip," the researcher said.
According to Rajan's research, pension funds will have a minor (5%) exposure to opportunistic investments as fixed part of their portfolio in the near future.
CREATE-Research's next survey among pension funds and asset managers on volatility will start later this month.