The Future Fund is focusing on building its internal capabilities to better handle increasing complexities in financial markets.
Hiring has gone ahead across the organisation to ensure its investment functions are resourced to be nimble in identifying and taking up opportunities in niche areas (reflecting the competition for good investment opportunities) and in support functions, which are needed to implement investments.
David Neal, managing director of the Future Fund, said the fund had not only been working on the portfolio, but also on its team and processes.
“The world only ever seems to get more complicated, with regulators changing the rules and the emergence of new types of asset classes constantly challenging our team. The competitive environment for assets at the moment is about as hot as it could be,” Neal said.
For the last six months of 2015 the sovereign wealth fund of Australia returned 1 per cent. For the full the calendar year it returned 8.4 per cent, bringing total funds under management to $118.4 billion.
Neal said that as well as building the investment team – including the new head of equities Björn Kvarnskog, formerly of the Swedish pension fund AP4, who is due to start within a couple of weeks – the fund had also been adding to other teams.
“We’ve also been adding strength into our support areas, into our operations team, into our legal team. We’ve been building up our capabilities on the IT side and management side, to position us for continued strength into the future,” Neal said.
The fund’s head count at the end of 2015 was 119. At June 30, 2015 it was 112, compared with 98 one year previously.
The fund is continuing to recruit, having just closed applications for the positions of ESG manager and analyst of infrastructure and timberland. It is still taking applications for a senior investment accountant until February 8, 2016.
Neal said one of the things that had made the fund increasingly cautious – its cash holdings were 20.6 per cent at December 31, 2015 compared to 12.8 per cent the previous year – was that alongside greater risks it was expecting to receive relatively low returns, as real yields were low and risk premia were modest.
“Perhaps the other thing that is different [about this investment environment] is that policy firepower to deal with any potential downturn is rather more limited than perhaps it is in normal times,” Neal said.
The interest rates are already extremely low, unconventional monetary policy is already working hard, and fiscal policy is perhaps more restrained across the globe than it normally would be.
“So the ability to deal with a downturn is lower, prospective returns are lower, and so for any given amount of risk in the global economy we think that means you should be rather more conservatively positioned.”
The cash weighting is also used to adjust for total portfolio risk, as the fund sees better value investments further up the risk curve.
Over the year the fund has sold down more than of $15 billion of assets, with a large portion reinvested into new investments. One of the publicised sales was the Waterfront Place in Brisbane. It was the largest office sale in the country since 2009, going for $635 million, representing a 46 per cent gain in value.
“We’ve also rebalanced our private equity portfolio with a significant sale there, reflecting strong returns and that portfolio becoming a large part of our overall portfolio,” Neal said.