GPF expects lower returns amid stormy markets

Amid high fluctuation i n the capital market, the Government Pension Fund (GPF) expects returns this year will be lower than last year, but can still beat inflation.

The fund’s strategy is to park money in short-dated bonds, shifting more to longterm notes when yields increase, said Vitai Ratanakorn, GPF secretary-general.

Funds across the world are experiencing the same situation as rising interest rates take a toll on bond markets while share prices are already high, likely meaning lower returns than 2017, he said.

The GPF’s investment return stood at 6.43% last year, while it yielded a mere 0.94% for the four months to April. Its three-year return averaged 4.97%.

While this year is considered to be challenging for investors, Mr Vitai said a tougher outlook is expected next year as the local interest rate is likely to be raised, affecting investment returns.

The GPF is required to allocate at least 60% of its investment portfolio in debt instruments, the nature of which is low risk, he said.

The GPF investment portfolio amounts to 396 billion baht, of which 62-63% are put into bonds.

To guard against the impact from the likelihood of an interest rate hike, the GPF is shortening the average maturity of short-dated notes to 2.1 years from 2.5 years, said Mr Vitai. Thailand’s shortterm yield should be kept unchanged, but longer-dated peers are expected to increase in line with the US.

The yield of the US’s 10-year treasury is at 3.1%, while that of Thai bonds with the same maturity stands at 2.7%.

For the equity market, he estimates returns from US stocks, which hit a record high last year, will be flat or even post losses this year as the market is concerned that economic growth of the world’s largest economy will slow after continuously expanding over the past nine years, the longest winning streak in history.

Moreover, the stronger baht will deal a blow to GPF’s investment returns, given that 27% of its portfolio is allocated to the overseas market, he said.

Even though the baht is retreating against the US dollar, the movement is expected to be short-lived and the baht is projected to reverse the downward trend late this year, said Mr Vitai. The GPF should consider further hedging against foreign exchange risks, he said.

Around 60% of overseas investment is hedged at the moment, up from 35% early this year.

The GPF has more than 1 million members and is moving towards becoming a digital organisation by allowing members to make all transactions through a mobile app in the next 12 months.