The Future Fund is focused on building a portfolio of “somewhat risky assets” in order to achieve its government-mandated return, says its chair, David Gonski.
“The government has the right to proclaim mandates for the board, and the current and original mandate set a target benchmark return for the fund of CPI plus 4.5 to 5.5 per cent per annum over the long term with instructions that the fund take acceptable, but not excessive, risk,” Gonski told attendees at a FSC/Deloitte Leadership lunch in Sydney.
Gonski said the return target is challenging, with the fund having to build a portfolio of “somewhat risky assets if we are to achieve our mandated returns”.
“It is worth nothing that to many, the return objective inherent in the mandate seemed a good deal easier when it was easier – it was set in 2006, when the cash rate was around 6 per cent and heading towards 7 per cent, and inflation was around 3.5 per cent – than it appears today,” he said.
Acceptable, but not excessive, risk
Gonski said the fund has returned above the long-term benchmark with 8.1 per cent per annum over the last three years. He said the fund’s risk tolerance is for “acceptable, but not excessive, risk”, with the most critical factor being how the fund strikes the right balance between risk and return.
“…This is particularly salient given our return target is much higher than the current risk-free rate of return, which is around 1 per cent above CPI.
“Nevertheless, we also recognise, as does our mandate, the importance of protecting the Commonwealth’s capital, and we work hard to achieve the required returns without exposing the fund to undue potential for capital loss.”
Gonski said the fund achieves this through a highly diversified portfolio, and a flexible and dynamic approach to taking risk.
“We will take higher levels of risk when strong reward is available and we will reduce our risk profile where we believe risk is not appropriately rewarded.”
About 90 per cent of the Future Fund’s portfolio is allocated to diverse non-cash asset classes and the remaining 10 per cent in cash. The fund will be increasing its exposure to infrastructure, property and private equity, Gonski said.
“We have increased slightly our equities exposure to 40 per cent with an acknowledgement that emerging economies in the long term should provide good opportunities for growth.”
The Future Fund is dedicated to building its understanding of Asia and emerging markets more broadly, said Gonski.
Earlier this year the fund built on its Australian infrastructure portfolio, allocating nearly $1 billion towards Melbourne, Perth and Launceston airports.