Super funds explore cash alternatives as low yields persist

The low returns offered by cash and fixed income presents a headache for super funds when it comes to selecting defensive assets, especially for those conservative members.

Speaking at Australian Institute of Superannuation Trustees (AIST) conference, Leanne Taylor, head of portfolio construction at Cbus, said the fund had been exploring “enhanced income” options for these portfolio options.

“You still need cash to operate and execute portfolios and be able to deploy to other assets. In our diversified growth options, we have been reducing the overall weighting though,” Taylor said.

“The challenge comes with the conservative and conservative growth options and this is something we have been acutely aware in of in terms of if you weren’t in cash and then you allocate to alternative assets, does that change the risk characteristics of the portfolio?

“We are looking at introducing a new asset class called ‘enhanced income’ which sits between cash and fixed interest, it is really important for our conservative and conservative growth options because to achieve their real return objective is much more challenging.”

She said Cbus was working with members on aligning their expectations with the investment outcome from their funds.

Asked whether cash weightings could be restricted in the future, Sebastian Mullins, multi-asset fund manager at Schroders, said: “You still need some cash holdings in the event of a market shock or event but holding it in the long term it will drag on performance especially as most funds have a CPI+ objective and cash is well below that and earning a negative yield.

“You need to include it in your strategic asset allocation otherwise it’s hard to meet the benchmark because you don’t have the ability to build tactical overweight or underweight positions in certain asset classes.

“There is a space for cash but the overall weighting is coming down relative to the past because you won’t get that positive yield from it.”

Biff Ourso, senior managing director for Nuveen Real Assets, said there was still a place for real estate as a defensive asset class but that there was an “openness” among investors to look more broadly at alternative real estate assets instead of the “core four” property assets.

“We say we like to invest with the winds on our back and coming out of the pandemic, the needs were for a digital economy be that in cloud storage, data centres and healthcare,” Ourso said.

“We are seeing a merge of real estate assets and an openness to alternative real estate assets away from the ‘core four’.

“There are still opportunities in the office space but private real assets comes down to asset selection and underwriting. There are still returns to be made but it depends on the type of assets you are buying and what is driving it idiosyncratically versus the megatrends.”

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