LONDON Oct 18 The U.S. debt scare may be
changing the perception of what's considered a safe asset, with
investors increasingly seeing home as the haven.
In the run up to the Oct. 17 deadline to raise the U.S. debt
limit, classic go-to "safe" assets such as the Swiss franc, gold
or top-rated non-U.S. government bonds drew few anxious inflows.
However, those who moved to protect portfolios did sell
Treasuries, traditionally the No.1 safe haven asset, ditching
the short-dated maturities most vulnerable to the chance of
missing payments. U.S. money market funds exposed to such paper
also saw the biggest outflows in two years.
Others, including Japanese investors, brought money home to
park funds in liquid, familiar markets that have no currency
risks or additional transaction costs.
And this reinforces an emerging trend of conservative
investors gradually reducing overseas holdings to limit risk
against the backdrop of an aging population. This is a move that
benefits developed markets, home to nearly $56 trillion, or 70
percent of the world's institutional assets.
"What is a safe haven? You're looking for where you have the
security of the underlying economy and political establishment
and where you can get in and out of that investment without
crossing a massive bid/ask spread," said John Bilton, head of
European investment strategy at Bank of America Merrill Lynch.
Japanese investors have been most prominent in repatriating
their overseas holdings, offloading nearly $23 billion of
foreign bonds on a net basis in the week to Oct. 5.
As debt fears escalated, European fund managers pulled money
from emerging Asian and U.S. stocks in September and boosted
equity holdings at home where growth momentum is accelerating,
according to the Reuters monthly fund managers' survey.
Europe-based investors boosted local equity weightings to
32.4 percent, levels not seen since October 2011.
UK-based investors pushed domestic equity holdings to 23.4
percent from 22.7 percent in August while in Japan, domestic
equity holdings are at the highest level in at least a year.
Ageing societies and tighter regulation are prompting many
investors to scale back their overseas investments, partly to
align their assets with liabilities.
Anthony Deeley, pension trustee of UK-based engineering
company GKN, says the priority of one of the company's pension
schemes that is closed for new entrants is cutting risk and
sterling-denominated home assets play a significant role.
The average age of this pension scheme's members is 78.
"We do pay pensions in sterling, so assets valued in
sterling are much easier to manage partly because we don't have
to have currency hedging. It makes life much easier," he said.
In Britain, the share of domestic sovereign debt has risen
four-fold to 35 percent in 2011 since 1994. The share of
overseas securities peaked at 35 percent in 2007 before falling
to 29 percent in 2011.
"By expanding your portfolio abroad, you will also add
currency risk volatility to your portfolio and as we see it, we
are not systemically compensated for taking that risk," Tomas
Franzen, chief investment strategist at Second Swedish National
Pension Fund, said in a report published by Clear Path Analysis.
Within developed markets, home-biased flows are likely to
benefit Japan and Europe, where the population is aging faster
than in the United States.
EQUITIES VS BONDS
In the run up to the Oct. 17 deadline, classic risk
reduction through rotation from equities to bonds was not
Bilton said bonds may no longer be enjoying a safer status
than equities. According to BofA's calculations, the Sharpe
ratio - a measure of the excess return per unit of risk - of
bonds is now lower than that of equities for the first
meaningful period since 2006.
"Bonds are riskier than equities for the amount of risk you
get, and that's very unusual. That inversion questions what is
the safe haven," Bilton said.
(Reporting by Natsuko Waki; Editing by Ruth Pitchford)