Superannuation funds have the opportunity to outperform the fixed interest benchmark in the wake of APRA’s decision to exclude private credit from its nominated benchmark – the Bloomberg AusBond Composite 0+ index.
The Bloomberg index only captures the government and public corporate bond markets, excluding private credit that comprises 36.1% of the US$3.6 trillion Australian debt market (excluding home mortgages).
In a research report commissioned by asset manager Epsilon Direct Lending on the private credit market, the consulting firm Atchison examines the impact of including a range of private debt instruments within the fixed income allocations of superannuation funds under the Your Future Your Super (YFYS) regime performance tests and concludes that by including key components from the one-third of the credit market missing from the benchmark, performance can be improved without compromising tracking error and credit risk.
Atchison Director Ken Atchison says: “Investment in private markets offer the prospect of higher returns than portfolios invested solely in public markets by capturing the information, liquidity and complexity premiums.”
The research report developed and analysed the YFYS fixed interest benchmark index as well as three variations of the standard portfolio, including private debt. Two benchmark unaware portfolios, including significant private debt, were also analysed.
Atchison says: “Returns and tracking error for the six portfolios were generated on an historical and prospective basis. On an historical basis over 18 years, the Bloomberg index has provided a marginally lower return reflecting the longer duration that has been rewarded by falling interest rates. Tracking error was less than 0.6% when measured over a rolling 8 year period.
“But while the Bloomberg index has benefited from the bull market bond rally in recent years, it’s a fair assumption that it has run its race and that debt securities with shorter durations will have greater appeal. In this market, private credit can only benefit.”
Epsilon Founding Partner Joe Millward says: “The research demonstrates that the addition of exposure to private debt will prospectively generate higher returns of up to 1.0% a year. In a diversified portfolio, the tracking error of the Australian fixed interest portfolio will present a minimal additional risk when measured against the YFYS fixed interest benchmark. Nor will credit risk be increased materially. After fees, the portfolio returns are enhanced and provide adequate reward for the additional tracking error.
“For decades, the Australian banks have delivered exceptional returns to shareholders. This has been driven, in no small part, by the strong risk adjusted returns delivered by their private loan portfolios. Australian superannuation members now can access high quality loans to Australian companies that have been the exclusive domain of the banks for far too long.
A copy of the research report can be accessed here. To learn more, please contact Joe Millward (Founding Partner, Epsilon Direct Lending) directly on joe.millward@epsilondl.com.au or 0423 739 710.
About Epsilon
Epsilon Direct Lending is an Australian based private credit asset management firm, providing bespoke financing to performing, Australian and New Zealand middle market companies that are looking to expand and grow.
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Media:
Nicholas Way
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E: nicholas.way@shedconnect.com