The Founder and Chairman of Clime Investment Management, John Abernethy, has seemingly done it all in his 40-plus years in investing - from managing multi-asset portfolios, to alternative assets including venture capital, and now overseeing a sizeable investment portfolio and financial advice business.

He told Morningstar’s Wealth of Experience podcast, that the current trend of investment managers, including super funds, increasing allocations to private investments isn’t new, and has some potential issues.

Abernethy says the large inflows into super funds are forcing them to look beyond listed equities to alternative investments.

“I think there’s been a bit of defaulting going on in the industry funds. I’m not saying that they are doing the wrong thing, but they aren’t admitting to the problem they have, which is that they have too much money to invest, and they’re trying to structure deals and the unlisted market is an avenue, and a growing avenue for them.”

Abernethy recalls that when he was an investment manager at NRMA in the early 1990s, large inflows into equity funds resulted in the insurer taking large, often substantial stakes in ASX-listed companies. And good performance in these funds led to further inflows which meant NRMA had to look beyond listed stocks to unlisted assets.

Put simply, size became an issue for NRMA, as it has for super funds now, Abernethy believes.

In the broad-ranging podcast interview, Abernethy also that despite the sharp rise in Australian bond yields over the past 18 months, bonds still don’t offer attractive value:

 “A 10-year bond at 4% is not very high in my lifetime. Yes, we’ve seen lower recently, but 4% I can tell you is not a high bond yield. And when you put it against the inflation rate at present, it’s a very low bond yield ie. it’s negative real yield.”

And that based on the current bond yields, equities remain a good place to invest:

“My belief is that over 5 and 10 years, equity returns will substantially outperform a bond yield of 4 to 5%.”

Abernethy emphasizes the importance of dividends to total investment returns. He points to the surprising fact that Australia has been one of the worst performing developing markets over the past 15 years, on a price basis. The ASX 200 peaked close to 6,750 in October 2007, and has risen only about 8% since that time. Yet, if you include dividends, the performance has been far healthier.

ASX 200

ASX 200

In the interview, Abernethy criticizes both the RBA and government for recent policy moves. He says cheap money and an unregulated mortgage market has led to households taking on too much debt to buy homes. That limits how much the RBA can raise interest rates. And government policies on wages and energy risk entrenching inflation in the medium term.

You can listen to the full interview with John Abernethy here.

James Gruber is an assistant editor for Firstlinks and Morningstar.com.au

Wealth of Experience podcast