Mr Belman will lead the firm’s infrastructure origination, investment and execution efforts in North America. QIC is one of Australia’s largest institutional investment managers, offering infrastructure, real estate, private equity, liquid strategies and multi-asset investments.

Mr Belman’s appointment is part of QIC’s geographic expansion strategy and further deepens the firm’s sector expertise in the infrastructure space. This hiring follows the appointment in March 2015 of Giles Tucker in London to develop QIC’s European infrastructure investments efforts and Vittorio Lacagnina in October 2014 to lead investor origination in infrastructure across the Northern Hemisphere.

Ross Israel, Head of QIC’s Global Infrastructure said: “I’m delighted that an infrastructure executive of Eric’s calibre is joining QIC. He will be pivotal in helping to lead and execute QIC’s global infrastructure offering. Eric’s appointment deepens the experience of our team across key sectors and geographies.”

Mr Israel continued: “Eric has an outstanding record of achievement in complex industries, including energy assets and other global infrastructure. His deep understanding of the North American marketplace, where we currently have A$620 million (US$435 million) of infrastructure investments, and in operating infrastructure businesses will be of tremendous benefit to QIC.”

Mr Belman said: “I am excited to join a firm of QIC’s stature and reputation. I look forward to bringing my experience in infrastructure, technology and corporate strategy to QIC and helping build its relationships and broaden its investment opportunities and offerings in North America.”

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Speaking on the release of QIC’s Red Paper Au revoir credit beta: meet credit alpha, QIC’s Director of Fixed Income Research & Strategy, Katrina King, yesterday warned that institutional investors accustomed to strong returns from credit markets in recent years will need to re-think their current strategies or risk seeing the capital value of their portfolios eroded.

Ms. King said that while it is true that credit markets have been a strong source of capital returns in recent years and corporate bond yields are currently at their lowest level since the GFC, the economic environment is starting to change.

“It’s true that the situation today is still quite constructive overall, but as economic growth picks up and central banks move to normalise monetary policy, yields will gradually rise. Portfolios which simply rode the spread tightening of the past few years will be threatened,” she explained.

In Ms. King’s view, for institutional investors to benefit from corporate bonds’ yield advantage, they will need to take a truly active investment approach and look at removing both interest rate and inflation risk from their credit allocations.

“Inflation may be muted now, but it remains a worrying undercurrent,” she said. “Credit spreads have tended to rise when inflation uncertainty has risen. Investors have just lived through a lengthy period of ultra-low official interest rates which, while not our base case, carries the risk of causing an inflation outbreak.”

Ms. King said that at the same time, global economic conditions are improving, and businesses are responding positively. Shareholders are beginning to expect higher returns, which in turn puts pressure on management to take less risk-averse positions.

“I certainly don’t mean to suggest that companies are about to play fast and loose with their finances, but there is a definite sense that company-level risk is on the rise,” she said.

Long-only credit strategies, which have worked well over the past few years as global investors fled risk in all forms, are now less likely to perform. The next phase of the credit cycle will require much deeper analysis industry by industry and company by company to identify vulnerable companies as well as those with reassuring credit metrics.

Ms. King concluded that with the right approach to credit, investors have nothing to fear from the changing world order, and that truly active investors will find plenty of opportunity to exploit price gaps between industries as well as individual companies.

“At QIC our focus on outcomes has meant that we are happy to decouple from the benchmark and manage the three levers of inflation, interest rate and credit risk separately, in order to harness multiple alpha sources.”

“Current market conditions are calling out for this kind of unconstrained approach, including macro positions and long short trades between different indices in order to make the most of corporate bonds’ yield advantage,” she said.

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Beware the risks associated with benchmarks.

In an uncertain market, an absolute return focus rather than a benchmark driven one is more likely to protect fixed income investors – as disappointing financial year returns from many benchmark driven funds have already indicated.

According to Susan Buckley, Managing Director of Global Fixed Interest for investment manager QIC, there are inherent risks associated with benchmarks – and the current environment serves only to exacerbate those risks.

“Benchmarks have long durations, meaning they are sensitive to interest rate movements. Security selection is about issuance not investor return profiles, because the biggest debtors make up the largest component.”

Ms Buckley went on to explain that QIC has a different approach, focusing on building a portfolio which manages interest rate, credit and inflation risk separately according to what is influencing markets at any particular time. The returns of the QIC Inflation Plus Fund, compared with those from the UBS Government Inflation Index, support this approach.

The index returned -1.45% for the year to 30 June 2013, compared with a return of 5.36% from the QIC fund for the same period.

“No one will be surprised to hear me say that the rally we’ve seen in fixed interest from the end of the global financial crisis until late last year is unlikely to continue. But as interest rates inevitably rise, many of the benchmark driven investment approaches will disappoint investors.”
Moving on to discuss the themes in fixed interest markets for the 2012/13 financial year, Ms Buckley said that for the first time since 1994, the Australian Government Inflation benchmark produced a negative result.

“The result wasn’t entirely unexpected because the dominant risk associated with investing in these benchmarks is their sensitivity to interest rate movements. Returns fall sharply when yields rise in the aggressive manner we saw in May and June this year,” she said.

Ms Buckley then explained that yields began rising on the back of comments from the Chairman of the US Federal Reserve, Ben Bernanke. He intimated that the recovery in the US economy had progressed to a point where the program of quantitative easing (QE) might be wound back. This prompted a flurry of activity in May and June. Yields on both US 10 Year Treasuries and Australian 10 Year Bonds rose by 1% in 8 weeks – sending returns into free-fall.

In fact, uncertainty about the effect of the US Federal Reserve’s policies decimated returns from some of the biggest benchmark driven bond funds globally. One example of this impact was seen in the PIMCO Total Return Fund, the world’s biggest bond fund managed by fund manager Bill Gross. Mr Gross had been investing on the basis that quantitative easing would ultimately fuel inflation, and yet the fund fell 4.7% between May and June this year as markets disagreed.

In conclusion, Ms Buckley reminded investors that a rising tide lifts all boats, and that this has been the case in fixed interest until recently. Everyone wanted to go long on bonds as they rallied on aggressive buying from central banks. However, the world is looking different now. The yield cycle has likely troughed and, as liquidity injections from central banks diminish, yields are likely to return to more ‘normal’ levels.

“We understand that moving from a benchmark approach to absolute return is big decision, but I firmly believe a diversified portfolio with no bias to a benchmark or any particular risk factor is a superior solution for investors,” Ms Buckley said.

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This new role will be responsible for sales and marketing, client services and product development for GRE.

“QIC is looking to strengthen its sales and distribution capability and David is an experienced professional having worked for both LaSalle Funds Management and Challenger Funds Management,” said Paul Leitch QIC Managing Director, Human Resources and Corporate Communications.

“David has extensive experience in alternative assets and will work directly with incoming Managing Director, QIC GRE Steven Leigh to grow the global real estate business.”

David will commence with QIC GRE on Tuesday 7 August. QIC GRE is a leading Australian real estate manager that has over the two decades acquired and developed a significant portfolio of dominant regional shopping centres and commercial buildings valued at $8b.  QIC is Australia’s third largest institutional investor* with $64.7 billion in funds under management as at 30 June 2012.

17 July 2012

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