Managing the risk of stagflation: Ian Patrick of the Australian Retirement Trust

The global economy faces a potential period of stagflation with persistently high inflation and slow growth, according to the chief investment officer of the $230 billion Australian Retirement Trust (ART), Ian Patrick.

“There is a very real possibility of a stagflationary environment,” he said in an interview with Investment Magazine.

Patrick, who was Sunsuper’s investment manager before it merged with QSuper earlier this year to form Australia’s second-largest superannuation fund, ART, said investment managers were now faced with taking decisions in an environment of persistently high inflation and the prospect of rising interest rates and a potential recession.

“It’s an exciting time to invest,” he said. “There is now tension in the debate. Has inflation – or more importantly inflation expectations that drive long-term interest rates – peaked? »

“Or will we still see an upward movement in inflation and inflationary expectations and therefore interest rates?”

Rising rates hurt bonds

He said if interest rates were to continue to rise, investors could lose money investing in bonds.

“It’s the classic portfolio decision – do I want to go defensive now, even though I’m a bit ahead, or are we only halfway through the move [of rising interest rates]? I think we’re probably closer to the end [of rising interest rates].”

Patrick said ART would not invest much more in bonds due to concerns about the outlook for stagflation, but was expanding its bond portfolio to more countries beyond the United States. States and Australia.

He said government bonds were now yielding around 3%, which was much better than in recent years. If the world were heading into a recession, this would be a good investment.

“If you were to see the typical response where government yields fall, bonds offer real protection. You get absolute return in a recession,” he said.

“You could make a pretty strong case for those who haven’t had a lot of bonds to reweight in favor of government bonds.”

“We’ve come so far in long rates since 2020 and we’re looking at the prospect of a recession. The core asset to defend in a recession is a bond.

Patrick said he thought inflation, which currently sits at just over 6% in Australia, could moderate to around 4 or 5%. But he said it would be much harder to get below 4%.

He said there was a danger that central banks would react aggressively to push inflation below 3%, which would “certainly cause a recession”.

If they decided to take a simpler approach and “step on the brakes”, inflation could “last a little longer”.

“Inflation is not important for a number of assets, particularly if we find ourselves in a classic stagflation environment and growth is weak.”

Diversify the asset base

He said his fund’s investment approach should be diversified and look for inflation-resistant assets such as unlisted assets, including infrastructure.

Patrick said he expects ART to continue to invest in significant transactions such as its recent agreement to take over vehicle registration and licensing operations from Vic Roads, in a consortium with Aware Super and Macquarie Asset Management, and the agreement to invest $150 million in social housing projects in Queensland with QIC and the Queensland Government.

Patrick said the fund was ready to make more deals with governments, responding to comments from Federal Treasurer Jim Chalmers who called on super funds to sit down with the government to consider major investments in nation-building projects. such as renewable energies or social housing.

But he said these agreements involved complex negotiations to ensure that the super funds did not pose high development risks and could invest in the best interests of their members.

Size Matters

He said the merger of QSuper and Sunsuper this year to form the Australian Retirement Trust has given the combined group a lot more bargaining power when it comes to being involved in big deals, especially big assets. not rated.

He could also have a stronger presence at the table demanding board seats with his investments like he did in the Vic Roads deal.

“The combination of funds offers a different set of investment opportunities. The most notable example is our recent agreement with VicRoads. If this had been an investment that had just been made by Sunsuper, we probably wouldn’t have applied for enough capital to have a full director.

“We wouldn’t have had the same input and control in governance. As a combined fund, we are talking about a higher proportion of equity.

Being a larger fund also meant it could negotiate cheaper investment management fees from external fund managers.

Patrick said bringing the two funds’ investment management teams together also provided synergy as “each team had strong capabilities in particular areas.”

“Almost instantly you get this new ability in terms of a combined team that will bring value to the members. We can do some things more cost effectively than before.

ART now sees annual fund inflows of approximately $10 billion a year from member contributions and an additional $10 billion through securing new business from financial advisors and supporting other funds to manage, such as the Australia Post pension fund.

He said he’s also seen ART do more complex and larger deals with investment managers like QIC, New York-based Global Infrastructure Partners and Canadian asset manager Brookfield.

Increase private credit

Patrick said he also sees ART becoming more involved in private credit, including lending to large corporations and for property developments.

But he said it reduces the risk of these investments through diversification. “We have significant exposures in the private debt universe, both in Australia and overseas. But the majority is offshore.

“With most corporate debt, whether listed or private, you want significant diversification between your counterparties because of the risk of default, especially in an economic downturn.”

“You never know exactly who will be the winner, so you want to diversify the risk of default.”

He said the private debt markets in the United States and Europe were much deeper than those in Australia. “That’s not to say we’re not involved in private debt in Australia – we are.”

“But I wouldn’t support allocating all of our private debt to Australia and a limited number of companies. If you did, you’d miss out on diversity.

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