Negative rates put asset owners in uncharted territory

What may have once been unthinkable is now the new normal. We live in a world of negative interest rates. For retirement funds, which safeguard the financial security of tomorrow's retirees, it means the future is unclear at best. "We are in uncharted territory," said Innes McKeand, head of equities at the A$165 billion ($112 billion) AustralianSuper, the largest public retirement plan in Australia. "Those of us who have been around a long time are struggling to get our heads around giving money to a European government, and they will give you a negative return for 30 years."

What are the other options — go big on private equity? Explore riskier markets? Or should asset owners simply readjust expectations for returns? Here's what those currently struggling with the conundrum about subzero strategies had to say:

Chief investment officer at the $379.2 billion California Public Employees' Retirement System, Sacramento.

"We should carefully study the experience of Japan in the past decades and, to a certain extent, the recent history of Europe. We can gain insight from what's happened elsewhere."

Head of treasuries at APG Group, Heerlen, Netherlands.

"Investors are forced to look at other asset classes for more attractive returns. This has pushed up prices in all accessible liquid assets and is causing long-term value investors like APG to look even further away, outside the eurozone and in more complex or less liquid real assets."

CIO at the $18 billion Kentucky Retirement Systems, Frankfort.

"You can up your risk, or you can just be cognizant of the fact that there's not that much return available and lower your assumed rates. Our assumed rate of return is the lowest in the country — 5.25% for our really poorly funded plans."

CIO at Allianz, Munich.

"In the future, we will continue to diversify even more into non-exchange-traded asset classes."

CIO at the $14.4 billion Maine Public Employees Retirement System, Augusta.

"We have a pretty big allocation to infrastructure. We think that that is less correlated to the equity markets and provides diversification."

Senior consultant relationship manager at AXA Investment Managers.

"In addition to negative rates, pension schemes are also becoming cash-flow negative as they continue to mature. This double whammy makes portfolio positioning a greater challenge than ever before — and one that requires long-term strategic alignment to their endgame. Using the right credit can help meet these dual objectives. Schemes must get comfortable with the fact that there may not be one perfect solution out there."

CIO at Australiansuper, Melbourne.

"We've talked about our plans to allocate more to private equity over the next three to five years. As well as being able to stand the relatively illiquid nature of PE, there is also the structural benefit that sustained low debt costs favor the PE business model."

CEO at the 24.8 billion Danish kroner ($3.6 billion) ATP, Hilleroed, Denmark.

"It's going to be harder to earn money in the future. That's why I say we've gotten returns in advance."

CIO at Ilmarinen Mutual Pension Insurance Co., Helsinki.

"Private credit has been growing in size in our asset allocations. There are products and managers and investment opportunities that'll provide you a 2% to 3% return. Then if you go to the riskier part of the market, we are starting to see return levels of 10% to 12%."

CIO at Varma Mutual Pension Insurance Co., Helsinki.

"There have been some initial talks with banks asking whether we'd be interested in investing if they were to issue (a high-yielding capital relief) instrument. In this environment, we as an institutional investor have a big demand for assets that have a proper yield. But we don't have any transactions lined up at this stage."

CIO at the A$9.2 billionTasplan superannuation fund, Hobart, Australia.

"We would generally reduce exposure to negative yields, though once we've hedged back into Australian dollars, even some European negative yield bonds may give us a run-in."

CIO at the A$69 billion Sunsuper superannuation fund, Brisbane, Australia.

"We like some of the lending in the energy space. We've got a fair allocation to midstream and upstream energy assets."