Home / News / Private credit offers YFYS outperformance opportunities: Atchison

Private credit offers YFYS outperformance opportunities: Atchison

News

APRA’s decision not to include private credit in the Your Future Your Super fixed interest benchmark creates an opportunity for super funds to outperform without compromising tracking error, according to a new report by Atchison Consultants.

APRA’s chosen benchmark for fixed interest – the Bloomberg AusBond Composite 0+ index – only captures the government and public corporate bond markets and excludes private credit, which comprises 36.1 per cent of the US$3.6 trillion Australian debt market (excluding home mortgages).

“On an historical basis over 18 years, the Bloomberg index has provided a marginally lower return reflecting the longer duration that has been rewarded by falling interest rates. Tracking error was less than 0.6% when measured over a rolling eight-year period,” said Ken Atchison, director of Atchison Consultants.

“But while the Bloomberg index has benefited from the bull market bond rally in recent years, it’s a fair assumption that it has run its race and that debt securities with shorter durations will have greater appeal. In this market, private credit can only benefit.”

Atchison’s research found that exposure to private debt could prospectively generate higher returns of up to 1.0 per cent per annum, with marginally higher tracking error of up to 0.6 per cent per annum measures over rolling eight year periods and with no increase in credit expected losses.

The research, commissioned by Epsilon Direct Lending, analysed the YFYS fixed interest benchmark index and three variations of the standard portfolio, including private debt. Two benchmark unaware portfolios – including significant private debt – were also analysed.

“For decades, the Australian banks have delivered exceptional returns to shareholders.  This has been driven, in no small part, by the strong risk adjusted returns delivered by their private loan portfolios,” said Joe Millward, a founding partner at Epsilon. “Australian superannuation members now can access high quality loans to Australian companies that have been the exclusive domain of the banks for far too long.”

“In a diversified portfolio, the tracking error of the Australian fixed interest portfolio will present a minimal additional risk when measured against the YFYS fixed interest benchmark.  Nor will credit risk be increased materially. After fees, the portfolio returns are enhanced and provide adequate reward for the additional tracking error.”

Staff Writer


  • Related
    ‘My performance doesn’t lie’: Liu responds to relationship revelations

    The romantic relationship between TenCap founders Jun Bei Liu and Jason Todd has exploded into the press, but Liu tells Investor Strategy News that her personal life has nothing to do with the running of her Alpha Plus fund.

    Lachlan Maddock | 11th Feb 2025 | More
    TelstraSuper CIO heads (back) to Mercer

    Industry veteran Graeme Miller will step into the chief investment officer job at Mercer Super after a nearly nine year stint at TelstraSuper where he played a “pivotal role” in shaping its investment strategy and approach to sustainable investing.

    Lachlan Maddock | 7th Feb 2025 | More
    Fidelity looks to niche assets, new clients for diversification

    The race to the bottom on low cost, benchmark aware solutions for a post-YFYS world has pretty much been run. But while the perception of value currently sits on price, that might not be where it ends up, according to Fidelity’s Simon Glazier.

    Lachlan Maddock | 5th Feb 2025 | More
    Popular