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Global debt funds set up Aussie shops as A$2.3t calls

[SYDNEY] More global fund managers are setting up shop in Australia, drawn to the nation's A$2.3 trillion (S$2.44 trillion) pension savings pool and new local investment opportunities.

THL Credit Inc, an alternative credit manager based in Boston, said in September that it hired a director in Australia. New York-based credit hedge fund GoldenTree Asset Management opened an office in Sydney last month after appointing a local managing director. Oaktree Capital Management, which already manages Australian pension money, headed Down Under last year as it also sought local investments.

The developments are part of a broader global trend as low interest rates in North America, Europe and Asia prompt money managers to increasingly seek assets they had previously seen as too risky. There are also uniquely Australian factors. The world's fourth-largest pension pool is swelling due to mandatory retirement saving rules. Many Aussie funds have little choice but to seek overseas investments as well as alternative assets as they outgrow local equity and corporate bond markets.

THL sees the Australian pension market as an opportunity, according to Michael Backwell, director of THL Credit in Australia. "Capital markets in Australia are also relatively small compared to a country like the US," he said. "And that naturally means funds should potentially be invested offshore."

Australia's US$1.3 trillion stock market is about the same size it was 10 years ago, yet pension assets have more than doubled in the same period. Around 41 per cent of new investment deals struck by Australian pensions this year have involved alternative money managers, rising from 31 per cent last year, according to Rainmaker Information Pty.

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The nation's top performing pension fund over the past five years, Host-Plus Pty, invests 40 per cent of its A$26 billion portfolio in assets such as infrastructure, hedge funds and private equity. The superannuation fund is ready to pour more money into alternatives when the right opportunities arise, said Chief Investment Officer Sam Sicilia.

"When super funds are small they invest locally but as they grow in size, it's natural that they go global and diversify their assets," he said.

Near-zero interest rates at central banks from Tokyo to Frankfurt have pushed more pension funds to seek alternative investments. Japanese retirement savings managers have become eager buyers of private real estate trusts. Europe's leveraged-loan market has been fueled in part by pension and insurance firms.

Canada's public pension funds, among the world's biggest, are piling on risk with leveraged bets, according to Moody's Investors Service.

Many funds are now setting up to be closer to where the assets are, said Michael Gallagher, Australia general manager at the Alternative Investment Management Association. AIMA, which represents local and global alternative money managers in Australia, has seen its ranks double to 120 members in the past three years, Mr Gallagher said.

Other institutional investors embracing new asset classes include the nation's sovereign wealth fund. The Future Fund invested 15 per cent of its A$133 billion portfolio in alternatives as at June 30, climbing from 12.7 per cent two years ago. Alternative investments represent the third-largest asset class at the Future Fund after global equities and cash, according to a Aug 31 portfolio update.

Melbourne-based Emergency Services & State Super also invests in hedge funds Bridgewater Associates, Oaktree Capital and Elliott International Capital Advisors Inc, according to the firm's 2017 annual report.

Not all pension managers believe hedge funds and alternative debt managers are worth the risk, with some in the US having pared back investments. Hedge funds struggled to outperform last year, with the average strategy delivering less than half the return of the S&P 500 Index of US stocks. Some of the strategies including distressed debt lack "transparency" and hold no appeal to UniSuper Management Pty, chief investment officer John Pearce said.

"The fancier the strategy, the less inclined we are to invest," said Mr Pearce, who looks after the retirement savings of Australian university staff at the firm with A$60 billion of assets under management. "We pride ourselves on being able to explain in plain English what our portfolio consists of."

Still, others see opportunities in the country, including in distressed debt. Billionaire Marc Lasry, head of Avenue Capital Management, recently flagged opportunities in that field.

Others are also looking at leveraged loans, amid burgeoning appetite as capital requirements prompt traditional lenders to pare risk.

The nation's biggest pension fund, AustralianSuper Pty, has been investing in Australian syndicated loans including those backing leveraged-buyout deals. Others such as Victorian Funds Management Corp, which provides investment services to local pension funds, have also dipped into the leveraged loans market.

More fund managers are coming to Australia as pension assets expand, according to Sicilia at Host-Plus.

"But if you do come, be prepared to come here on the terms set by the superannuation industry," especially on competitive management fees, he said. "They need to build relationships with funds to succeed."


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