While most countries around the world are battling high inflation and rising interest rates, Fiji has kept rates low. We talk to Ashwin Pal about what this means for the Fiji National Provident Fund’s fixed income portfolio
In most countries around the world, institutional investors have been asking themselves what an environment of higher inflation and increased interest rates means for their investment portfolios and future returns.
In Australia alone, the Reserve Bank of Australia raised the cash rate 11 times over the last 12 months and it now sits at 3.85 per cent. Inflation came in at 7 per cent over the 12 months to March 2023 in Australia.
Higher inflation is usually bad news for equity investments as it causes borrowing costs to increase, which then leaves less room for growth. Increasing interest rates causes the prices of bonds to fall, making them also less attractive, although at the current high level of interest rates they have regained some of their protective powers, as rates could fall again.
But in Fiji, institutional investors are faced with the opposite situation.
The Reserve Bank of Fiji has kept its overnight policy rate at 0.25 per cent since 2020, when it lowered the interest rate from 0.5 per cent. Inflation has crept higher, but in March 2023 the annual inflation rate was still only 2.5 per cent.
As a predominantly locally invested fund, the Fiji National Provident Fund (FNPF) is faced with the question of what to do with its fixed income holdings.
In Fiji, the situation is a little different, because it's a small, close-contained market with very few investors. Our experience in the market is that the bond rates have reduced and not increased, so the coupon has reduced, the yields have reduced. It's unlike what we are seeing in the international market, where [yields are] very attractive
The fund holds FJ$3.7 billion of its FJ$8.7 billion (AU$5.9bn) in fixed income, predominantly in government bonds. With the 5-year Fiji government bond yielding just 1.84 per cent, returns from this portfolio are under pressure. Majority of fund’s holdings are in 15-20 year bonds with high yields however the yield over that last 3 years have been drastically reducing.
Recognising the challenges of the lower interest rates, the FNPF has been reducing its weight to fixed income in favour of growth assets in recent years.
“In Fiji, the situation is a little different [than internationally], because it’s a small, close-contained market with very few investors,” Ashwin Pal, General Manager of Fixed Income Investments and Treasury at the FNPF, says in an interview with [i3] Insights.
“Our experience in the market is that the bond rates have reduced and not increased, so the coupon has reduced, the yields have reduced. It’s unlike what we are seeing in the international market, where [yields are] very attractive.
“We’ve been experiencing this for the past several years, the rates have been going down, and we understand that growth assets provide the opportunity to enhance the return to our members. So that’s the strategy,” he says.
Where 10 years ago, the FNPF had an asset allocation that was about 80 per cent defensive assets and 20 per cent growth assets, the fund now has a split that is closer to 65 per cent defensive and 35 per cent growth.
The plan is to move towards a more traditional balanced-style portfolio of 60 per cent growth and 40 per cent defensive assets.
To get there is not so much about selling bonds, but rather about allocating new money coming in from contributions and investment earnings to growth assets. Although Pal says the fund will look at selling a portion of high-yield bonds.
“Another part of my role is to look into the divestment of a portion of our highly concentrated FNPF bonds portfolio and we are working with the Reserve Bank to be able to go and sell high yield Fiji dollar bonds,” he says.
“We understand that Fiji dollar may not have the demand, but we’re happy to convert it into US dollar or pay US dollar returns on the bonds.”
Surviving the Pandemic
Being heavily reliant on overseas visitors, the Fijian economy suffered from the collapse in tourism during the pandemic. Many businesses had to close their doors, while others saw revenues dwindle and were forced to let go of staff.
Much like the Australian government allowed early access to superannuation savings during the global coronavirus pandemic to support people affected by layoffs, members of the FNPF could access part of their savings under certain hardship conditions.
In 2022, the FNPF saw FJ$64.4 million in early withdrawals, while in 2021 that amount was FJ$144.9 million.
“We have our member accounts split into 30 per cent that sits in the general account and 70 per cent that sits in the preserved account. The preserved account is not accessible at all; it is only accessible when you retire. But the 30 per cent split facilitates pre-retirement withdrawals.
“So the government announced COVID withdrawals for members and they were allowed to withdraw a certain amount of funds. There were several grounds for these early retirement withdrawals, including education, housing assistance and medical benefits,” he says.
But in addition to this, the Fijian government also temporarily reduced the contribution rate for members from 18 to 10 per cent, of which 5 per cent is equally contributed by employer and employee.
Although this helped Fijians cope with the fallout of the pandemic, it put pressure on the liquidity position of the FNPF.
We are the only superannuation company in Fiji and so anyone who is working in Fiji is mandated by law to be a member of the fund. Being people's only saving mechanism in the country as the economy went down was a challenge
“We are the only superannuation company in Fiji and so anyone who is working in Fiji is mandated by law to be a member of the fund. Being people’s only saving mechanism in the country as the economy went down was a challenge,” he says.
“The Fiji market relies heavily on tourism and the border closure had a negative impact. The closure had a ripple effect as tourism has around 40 per cent direct and indirect hold in the market. A lot of businesses opted to close down and the impact was immediate. We saw a 44 per cent loss in member contributions during the period,” he says.
The FNPF was also heavily exposed to the tourism industry in its investment portfolio, as it is a key investor in local hotels, including brands such as Marriot, Sheraton, Westin, Intercontinental and Holiday Inn. The drop in valuation of these assets put further pressure on the portfolio.
But the FNPF never came close to a liquidity crunch. For many years, it had been running a liquidity committee as part of its managerial processes and so it had a good handle on its liquidity position and available facilities.
“The liquidity committee meets regularly to assess the liquidity position of the fund and to address any cash flow issues that the fund might be facing. But in fact, we hold quite a good amount of liquid assets,” Pal says.
The fund’s overweight to defensive assets also helped the fund protect it from the worst of the equity market falls in March and April of 2020. “We have around $3.5 billion invested in government bonds and our government bond investment program is local. So that helped us protect the fort,” he says.
Being heavily exposed to the relatively small and concentrated economy of Fiji has made the FNPF realise there are benefits in diversifying their assets to include international investments.
In recent years, it has started to build a portfolio of foreign assets, which now stands at FJ$ 700 million (AU$478m), consisting of equity and defensive assets. And it is looking to increase its overseas holdings further.
“We’ve got a substantial amount invested in the Australian stock exchange and we’ve also done a number of direct investments, which are yielding double digit returns for us,” he says.
Any time we want to invest a large amount offshore we are required to seek approval from the Reserve Bank. But they have been very accommodating
“Now, the issue is, because we are a small economy and have country controls on foreign reserves, the Reserve Bank cross-border currency requirements have to be adhered to.
“So any time we want to invest a large amount offshore we are required to seek approval from the Reserve Bank. But they have been very accommodating,” he says.
In fact, the FNPF recently received approval to invest a substantial amount overseas and is working with a number of superannuation funds in Australia on co-investments.
Although the Fijian economy was severely hit by the global lockdowns that were part of the response to COVID-19, the country was one of the first to open up again and allow tourists back.
This has provided a welcome boost to the economy and allowed the FNPF to increase the contribution rate again. It currently stands at 14 per cent, but plans are to raise it back up to 18 per cent over time.
The improved conditions are also noticeable in the fund’s investment portfolio. For the 2022 financial year, the fund’s net investment income before expenditures has grown to FJ$650.8 million, from FJ$543.5 million last year.
Pal says the recovery is also noticeable in its property portfolio, which holds a number of local hotels.
“We hold and operate hotels and we can, through our experience, say that tourism is fully back,” he says.
“We can see that through our cash flows that we are generating at our hotels. We can see that in our forward bookings and we can see that the demand is actually pushing the hotel room prices higher.
“So yes, tourism is back now.”
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.