JANUARY 9, 2012, 3:27 PM
Article from The Wall Street Journal
By Enda Curran
Australian investors are being warned about stranger danger.
A push by Australia’s government to create a retail corporate bond market could prove dangerous for investors who don’t understand credit markets, a leading fund manager told Deal Journal Australia.
The remarks by Warren Bird, co-head of global fixed interest and credit for Colonial First State Global Asset Management–one of Australia’s largest bond buyers, come as Canberra attempts to deepen the corporate bond market by cutting red tape for issuers and enticing retail investors away from equities.
“We should stop trying to artificially create an Australian bond market and instead encourage Australian companies to fund themselves as cheaply as they can where ever they can from around the world,” Bird told Deal Journal Australia in an interview.
Australia’s A$1.4 trillion pension savings pool is one of the world’s biggest, but investors favor equities over fixed-income products. Only around 16% of the country’s pension industry is invested in bonds, according to the Association of Superannuation Funds in Australia.
The government will need to educate retail investors of the asymmetric nature of debt versus equities as an asset class and highlight the risk of downgrade and default, he said.
“We really are concerned that retail investors see a headline yield and think that’s all there is to it,” the fund manager said, adding retail investors should park their cash in credit via managed funds. “The equity mentality transferred over into corporate bonds is dangerous.”
Colonial prefers to buy credit through a globally diversified fund and Bird was cool on the notion that local wholesale investors should be buying more corporate bonds issued by Australia-based corporates.
“Our responsibility is a fiduciary one to our investor base, not a moral one to the corporates of Australia.”
As of June 2011, Colonial had US$160.0 billion in assets under management, US$55.0 billion of which was invested in debt securities.
On Australian state debt, Bird prefers securities issued by the governments of News South Wales, Western Australia and Victoria. “You can pick up more yield in Queensland but there’s a bit more risk as well,” he said.
Globally the fund is eyeing high-yielding corporate credit and Bird said he is happy to hold Italian debt around the 7.0% level, but has no appetite to buy bonds issued by the European Financial Stability Fund.
Supranational and agency debt issued out of Europe remains attractive, he said, adding the fund is comfortable with its European Investment Bank holdings despite a sharp widening in their spreads.
A euro-zone bond would be an attractive asset, though major questions remain over the single currency’s future.
“There are still big risks there,” Bird said.
Article from The Wall Street Journal