The Future Fund is looking to venture and early-stage opportunities in its private equity markets for growth, as it sees risk and fragility in listed markets.
“Listed equities, to put it politely, were lacklustre over the last financial year.
The world index lost 2.7 per cent in global currency terms, the local market just squeezed into positive territory with a 0.2 per cent return,” said David Neal, chief executive of the Future Fund.
He added the source of the $123 billion sovereign wealth fund’s 4.8 per cent return for the 2015/16 financial year came from its private markets portfolio.
“It’s an area where we continue to put a lot of focus,” Neal said.
“It gives us the opportunity to get away from relying on market returns, which we think are likely to be subdued, and look for genuine skill based or niche or opportunistic returns that are diversifying from that broader context.”
He added they were also continuing to explore private lending opportunities around the world, as banks’ balance sheets were constrained, as well as a number of attractive investments in real estate and in infrastructure.
“We’ve also been increasingly looking at private equity portfolio, particularly on the venture and early-stage growth side of things.
“We find that by taking part in the innovation wave, that is perhaps a multi-front wave across technology, and the disruption that’s creating, we’ve had significant success in investing and profiting from that dynamic.”
Risk and fragility
In Neal’s assessment, the world is continuing to contend with persistently high debt levels which, with demographic changes and globalisation, are exerting quite powerful deflation forces on the global economy.
“As you know monetary policy has been quite extraordinary for quite an extended period of time to address that. Despite this, growth has been a little tepid and inflation has been non-existent in many parts of the world, and there’s a growing sense of unease across the investor landscape that monetary policy is beginning to wane in its effect.”
He added there was concern that there was greater fragility in the system to any future shocks, because of the limited firepower to deal with them.
As such, given the low return environment and that fragility of the environment, the Future Fund has been gradually reducing risk in the portfolio, perhaps best exemplified by its 21.7 per cent allocation to cash.
“Essentially, over the last 18 months or so we’ve been … gradually reducing risk in the portfolio as that environment of returns has come down and risk has risen. At the moment, I would describe us as having a moderately conservative positioning in an overall total portfolio risk settings.”
“As we think about the returns experience, the markets have broadly reflected the overarching storyline that we’ve been putting forward for a while.”
