VicSuper has overhauled its core international fixed interest portfolio to reduce exposure to global sovereign bond risk through the development of a new index with reduced maximum weightings to individual sovereigns.
By working with the fund's investment adviser Towers Watson, fund manager BlackRock Investment Management and index provider Barclays Capital, VicSuper said it has customised a new benchmark index combining a tightly constrained sovereign benchmark with the credit exposures of the Barclays Global Aggregate Benchmark.
"It was about getting a better benchmark for global bonds in terms of one that wasn't quite as skewed towards some of the issuers of liabilities that we weren't particularly interested in," VicSuper chief investment officer Oscar Fabian told Investor Weekly. "It was very much about getting a better, less concentrated exposure to some of these less credit worthy sovereigns."
The previous benchmark VicSuper used for the core international fixed interest portfolio was Barclays Global Aggregate Index. The new benchmark will be published by Barclays Capital and will soon be available to the entire market.
The Global Aggregate Index provided by Barclays had about a 60 to 65 per cent exposure to foreign treasuries with the rest in non-treasuries, but the standard index gave a higher weighting to some of the economies VicSuper was less interested in, including around a 35 per cent weighting to the US and 30 per cent to Japan, Mr Fabian said.
The new index puts a cap of 10 per cent on individual countries and a 30 per cent collective cap on Eurozone countries.
"The idea was to try and get a better weighting scheme," Mr Fabian said. "On top of that it overlays an additional layer of 'credit-worthiness', checking where BlackRock systematically looks at concentration risk, default risk, and produces this sovereign risk index," he said.
This BlackRock Sovereign Risk Index is a non-investable index that measures relative government credit-worthiness in a systematic manner.
"We recognise that there is no individual solution to investing in global bonds that can safeguard against systemic risk", Mr Fabian said. "However, we strongly believe that this new approach to sovereign exposure will go a long way towards assuaging our medium-term concerns about the concentration and default risks in the government bond market."
In a statement, VicSuper, a 9.8 billion public offer fund, said the new approach is consistent with its commitment to integrating economic, environmental, social and governance (ESG) factors into investment decisions.
"[ESG is] always an important consideration for us, it wasn't the driver for selection in this case but it's something we take very seriously, we try and integrate it into all the sectors we invest in," Mr Fabian said.
"We look to invest with managers who integrate ESG into their standard investment processes, we do have some products with an ESG overlay, but the direction we're heading in is to ensure we invest in managers who integrate this into their processes."
