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The volatility in financial markets over February and March has seen a lot of investment institutions draw on cash reserves to meet contractual commitments. QSuper, as a large holder of cash and significant participant in capital markets has noticed trends pointing to a tightening of liquidity.
QSuper is highly liquid but has shared its observations with both the Reserve Bank of Australia and the Australian Prudential Regulatory Authority (APRA).
QSuper currently holds about 20% of its assets in liquid cash instruments.
QSuper’s cash is managed internally by the Capital Markets team which is tasked to manage liquidity of the Fund to ensure member payments can be made and all obligations are met.
Liquidity positions QSuper to take advantage of investment opportunities that become available.
The recent volatility has seen some asset prices, notably listed equities, fall precipitously across global markets, impacting the portfolios of many investors with holdings in shares and requiring them to support them with cash injections.
Conversely, some assets have risen strongly in value. For example, QSuper’s portfolio of high-quality sovereign bonds generated solid profits as bond yields fell in anticipation of policy makers stepping in and lowering interest rates in an effort to stimulate the economy.
QSuper’s substantial cash holding in its portfolios is in line with its investment strategy designed to offer our members diversification which helps give them a smooth financial ride.
The Capital Markets trading team accesses the financial markets directly for our members and can assess market sentiment and conditions as we trade exposures. Importantly, because QSuper has internal trading capability, we do not have to queue with other Funds (using external managers to implement trades) to have our trading positions implemented in the market.
This affords the investment team maximum agility to opportunistically attain or divest exposures to take advantage of price dislocations.
Because QSuper’s Capital markets team trades directly in the market, we are “plugged-in” to the market. We are better placed to manage cash with prudence to mitigate risks in the cash market.
Since 2019 QSuper has been a member of the Reserve Bank of Australia’s RITS (Reserve Bank Information and Transfer System). This allows QSuper, under specific conditions, to transact Reciprocal Purchase (repo) transactions, where eligible securities can be sold to the RBA (for later repurchase) in return for cash. This provides an added layer of liquidity source for QSuper members.
Our members know that we focus on diversification, and so it will come as no surprise that we have applied that to the management of cash. In 2018, QSuper established a pool of cash invested in top rated off-shore banks to provide some diversification from the Australian money market. These funds are fully-hedged. Having cash in different markets provides extra protection for members should we face liquidity issues in the Australian market.
Australian institutional investors often hedge all or part of their foreign currency (FX) exposure. They do this by buying FX derivatives. When the Australian dollar weakens, collateral calls are made because the value of international assets in Australian dollar terms rises. All collateral calls for QSuper have been comfortably met and the foreign currency exposure we maintain has helped support returns for the multi-asset class portfolios like the Balanced Option.
QSuper uses some derivatives to gain access to listed equity and bond returns. These are very efficient and liquid markets. During this period as equities have fallen, QSuper had to pay cash to fund margins but received more cash from the bond margins as bonds grew in value. This smoothed out the liquidity demands as markets have sold off.
QSuper’s cashflows are strong and have been positive through the recent volatility but the fund is very aware of liquidity issues apparent in the credit market.
Any shift to cash options is relatively minor in comparison to overall size of the fund.
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Keeping market volatility in perspective
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