The Future Fund has shifted its allocation away from developed markets equities and debt securities as it uses dynamic management to reduce risk levels at the margins.
The volatile environment in global markets has led, in the past year, to a portfolio reduction of 360 basis points of equities in developed markets, a 130 basis point reduction in Australian equities and a 140 basis point reduction in debt securities. Property, private and emerging market equities have been increased with the largest rise occurring in cash – a 380 basis point increase.
David Neal, managing director at the Future Fund, said: “While we continue to have significant exposure to risk assets, in this environment we have, at the margin, taken some risk out of the portfolio.”
Stephen Gilmore, head of investment strategy and risk at the Future Fund, echoed this assessment of a riskier future saying, “For some time we have forecast a ‘muddle through’ scenario where growth is subdued but returns are good. Now the dispersion of possible future outcomes has increased and there is more uncertainty about the economic outlook and returns are lower. So we have taken risk out of the portfolio.”
Macroeconomic factors, including bond yields, the fall of commodity prices, foreign exchange and interest rates have been considered as the Future Fund responds to the changing economic climate.
Gilmore said: “There has been exceptional ease in the policy stance of central banks, but even giving this there’s still limits to returns.” He added the low interest rates would lead to asset prices being higher, which in turn would give lower returns, making the Future Funds’ mandate harder to achieve. Some periods may not see any growth, but he believes the long-term focus of the fund gives it a “great advantage”.
Dr Raphael Arndt, chief investment officer at the Future Fund, said: “We have been selling a range of public and private assets. There are a number of strategies where we had been investing alongside a manager and where we have realised the value in that investment we have sold out. We’ve also reduced equities slightly.”
Adopting hedge fund strategies, looking into Australian infrastructure assets and having skilled managers in liquid assets are part of Future Fund’s plan in offsetting their position to control risk.
An increasing allocation to hedge fund and skilled strategies makes sense to diversify dependence on a single global risk factor.
Cash is being devalued in an era of financial repression so increasing longer term exposures to cash doesn’t make sense, although having some cash for opportunistic purposes may. That being said, with Australia having joined the global competition to depress their currency, and force investors out the risk curve, there are also ample opportunities in active Australian equities and one should expect the rally to broaden out locally (from just a yield large cap story). For example, selective small and midcaps will do exceptionally well here over the next few months. Cash could easily put to work here with the expectation of good returns.