Super fund QSuper and funds manager QIC have entered into derivative and swap contracts with investment banks as a means to insure against rising inflation.
QIC has bought $2 billion worth of derivative and swap contracts that provide direct access to the traditionally scarce inflation-linked bond (ILB) market.
ILBs differ from conventional bonds in that their nominal value changes in line with the Consumer Price Index. ILB exposures are popular because they provide investors with a hedge against inflation, particularly where inflation may impact on the valuation of an investor's liabilities.
QSuper made the decision to investigate ILBs, a first for an Australian super fund, and delegated QIC to source the exposures for them.
QIC chief executive Doug McTaggart said QIC and QSuper initially had difficulty sourcing ILB investment opportunities. "Basically we said if we can't find a market, we will create a new one", McTaggart said.
"This new swaps structure has led to an emerging market of inflation-linked bonds."
The technique is common practice in the UK and Europe, but QIC is the first to obtain an exposure of this scale, in this way, in the Australian market.
QIC's size and daily derivative management capabilities enable us to control this type of investment to ensure the best possible returns for QSuper members.
