The Future Fund has contracted by 0.9 per cent over the 2019/20 financial year – a result acting CIO Sue Brake has called “pleasing” owing to the difficulties faced by global markets due to the Covid-19 pandemic.

Australia’s sovereign wealth fund also completed the sale of unlisted assets including the UK’s Gatwick Airport – a process it announced last year – and sold some of its private equity portfolio.

The value of the fund now stands at $161 billion, having delivered an average 9.2 per cent per annum return over the past ten years, which is well above its 6.1 per cent benchmark. The fund has added over $100 billion in earnings since it was established in 2006.

Brake (pictured) said the fund is geared towards long term returns and can absorb short periods of negative returns during a quarterly update on Wednesday. She pointed out that the broad Australian stock market fell by over one third in March, and Australia had entered its first recession in 30 years.

“Our one year result has been been under unprecedented market conditions and an unprecedented response from the government against this one-in-100-year pandemic event,” Brake said. “So we think preserving capital over a one-year period in this environment has been a pleasing outcome.”

The fund’s defensive strategies–which include currency exposure, interest rate exposure and its alternatives portfolio–have performed as expected, Brake said, reducing draw downs during the particularly difficult months of Covid-19’s initial spread.

She said the fund is positioning for a challenging and volatile environment ahead by avoiding excessive risk, prioritising portfolio flexibility and ensuring ample liquidity to deal with a range of possible scenarios.

“We are very cautious about the future outlook, and we think it’s going to be harder to achieve good investment returns going forward,” Brake said. “So as a result we are positioned just moderately below our neutral risk setting and we are continuing to focus on the flexibility of our portfolio and our ability to reposition the portfolio should there be ongoing volatility.”

Inflation on the horizon

Brake said there is a lot of uncertainty around future investment markets, particularly regarding the impact of the withdrawal of government stimulus, and whether inflation would increase.

“We are conscious of the fact that the amount of fiscal stimulus we’ve seen around the world is likely to eventually lead to higher inflation,” Brake said. “We don’t believe that’s any time soon, [but] that will have implications for various strategies we have within the portfolio.

“We also think there’s so much uncertainty about how this is going to play out regarding the withdrawal of the support we’ve seen and what time frame that might occur over.”

The fund has rebalanced its private equity portfolio, reducing exposure to international growth and buyout managers on the back of strong performance.

“I…want to make the point that the downsizing is not a reflection on the importance of PE in the portfolio,” Brake said. “It’s still a very important part of the portfolio. One of the reasons it got a little large was outperformance, another reason has been currency movement.”

The fund has also completed the sale of other unlisted assets including its share in the UK’s Gatwick Airport, after announcing last year it was in the process of selling its stake. The Future Fund became Gatwick Airport’s second-largest shareholder in 2010 after buying a 17.2 per cent holding.

The capital from this sale was deployed into new infrastructure assets including fibre and data centres in Australia and offshore.

Brake said the fund is seeing attractive prices begin to emerge in some sectors but would not give details when asked to specify which ones.

“These kinds of disruptions they highlight risk but they also provide us with opportunities,” Brake said. “It’s a very interesting time to be an investor.”

The fund also provided initial returns for the Aboriginal and Torres Strait Islander Land and Sea Future Fund, the Future Drought Fund and the Emergency Response Fund. These funds only recently gained market exposure after being established at different times throughout 2019.

The $2 billion ATSILS Fund saw a negative return of -1.3 per cent since its exposure began in October 2019, while the Future Drought Fund and the Emergency Response Fund – each valued at $4.1 billion – both returned 3.4 per cent since their exposure began in April this year.

The $17.2 billion Medical Research Future Fund returned only 0.2 per cent over the 2019/20 financial year, but its three year return of 3.4 per cent per annum beat its target return of 2.7 per cent per annum.

These funds are lower return, lower risk funds than the Future Fund as part of their mandate.

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