Kevin Talbot is the influential Director, Australian fixed interest and currency for AMP Henderson and talks to us here about trends in the Australian debt markets.
How much money do you manage?
In Australia AMP Henderson has about A$63 billion under management and our fixed-income portfolio represents over A$20 billion of that. Currently in fixed income we are overweight Australian bonds and underweight international bonds because we feel that with 10-year bond interest rate differentials between Australian and the US at about 150 basis points, there is a lot more value in Australian fixed income compared to international markets at the moment.
What are the most exciting credits in Australia at the moment?
The Australian credit market has seen a lot of growth over recent years, especially in investment grade credits. Whilst this is great for the market as a whole, the credits I find most interesting are the ones that are the hardest to assess. Principally these deals are sub-investment grade, they have long lead times and you need a depth of resources to analyze them correctly, but the rewards are worth it. Two years ago our private debt fund comprised only four assets, now it has 12 and we hope to add a few more deals before year end.
Are you constrained by bond indices that don't include these lower credits?
No, our mandates have allowed us to invest down to BBB- for a while now and we have expanded our credit resources to reflect this. Where we have been constrained was by the lack of depth in credit issuance below A-. Prior to July this year we benchmarked ourselves against the UBS Composite index thinking that because we had the resources and approval to invest down to BBB-, we would outperform our competitors. Unfortunately this didn't encourage growth in this market and there were not enough lower rated deals forthcoming. So, from July this year we have adopted the UBS Fixed Debt index which includes BBB- credits. WeÆre hoping that by moving our internal funds along this route, that our clients, other fund managers and their clients and asset consultants alike will adopt this wider index which will help the development of the lower grade credit markets in Australia. This in turn will give us all a greater opportunity set in which to invest to add value to our clients.
There are some who are predicting a crisis in Commonwealth Government Securities (CGS) if the government continues to retire its debt. Do you agree with these concerns?
Yes, I am concerned that if the Government continues to retire Commonwealth debt that the market will become inefficient, illiquid and too small and irrelevant in a global sense. I am a firm believer that you need an efficient and risk-free asset class as a base to price all other asset classes off, including equities and property, not just corporate bonds.
Our domestic corporate bond market has taken a long time to develop and in recent years has come along in leaps and bounds. I am concerned to see that the government doesnÆt rock the boat now by taking away the anchor for which this market looks to price off; in other words, a liquid Commonwealth Government bond curve. A lot of good work could unravel very quickly. Besides jeopardizing the continued development of the corporate bond market, if the CGS market becomes much smaller than $50 billion it would become harder to maintain a futures market, thereby further reducing liquidity in our market.
In the end paying down debt any further would most probably be counter productive in my view as interest rates and spreads for the country, for corporate issuers, and importantly for the retail market, would actually widen as investors demanded a greater return to invest in markets that have in effect become too small on a global scale.
Does AMP run into capacity problems being one of two mega-investors in the Australian market (the other being Colonial)?
While we have had a large and liquid CGS market this has not been an issue. Indeed being big has been an advantage because it allows us to spend money on the resources necessary to compete with our global peers. Being big does create some problems when you get down to the lower-rated issues because we end up holding a bigger percentage of those stocks and occasionally we run up against internal limits. But again, there are advantages too. Issuers of these bonds know that they can rely on us to support their deals so sometimes we can negotiate wider margins or we can encourage them to structure the deal in a way that suits our portfolios.
What is the biggest challenge facing AMP as an investor?
Our biggest challenge in fixed income is competing with the global managers. Asset consultants are very keen to recommend global credits these days and our challenge is to convince them that the Australian market is changing and becoming deeper. We then need to prove that the Australian market has value by outperforming our competitors. The other main challenge is more market wide and brings me back to the earlier question in regard to the size of the government bond market and what to do with the proceeds of further asset sales. I believe that it is imperative that the Government adopt a steady-as-you-go policy so that our credit and capital markets continue to grow and develop and remain relevant. This is the biggest challenge facing us all.