For super funds and their advisers

Private credit offers YFYS outperformance opportunities: Atchison


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.”

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