Sue Brake

The emerging challenge of rising interest rates, inflation and asset prices will soften the ongoing performance of Australia’s Future Fund which has generated 10.8 per cent annual returns this decade against a 6.2 per cent per annum target.

Speaking to the Fund’s December 31 quarterly portfolio update, chief investment officer Sue Brake said its managers had long-anticipated the end of the rate cycle and sold down equity holdings in the quarter.

“We reduced our risk settings to below neutral… on the basis that world markets were not pricing in longer term interest rates that match our longer-term view,’’ Brake said.

Surpassing $200 billion for the first time, the Fund clocked a 15-year-high performance with a 19.1 per cent return for the year against a target of 7.5 per cent.

This came in tandem with a reduction in its equity allocation in developed markets by 1.1 per cent to 15.7 per cent and emerging markets by 0.5 per cent to 7.7 per cent in the quarter.

In comparison, property (6.5%), alternatives (14%) and cash (16.8%) all gained allocations in the portfolio.

Lower returns

“We anticipate lower returns in the future,’’ said chief executive officer Raphael Arndt.

“In response, we are seeking out opportunities to access value from less liquid and more skill-based investments and working our relationships with partners to identify more focused opportunities both to secure returns and to manage risk.”

Skill-based investments would translate to active decisions made to capture more value from private equity, property and infrastructure investments, Brake said.

However the milestone of reaching $200 billion, with no additional capital since starting with $60.5 billion, would not change the fund’s outlook which would “remain robust with a neutral setting to a range of scenarios”, Brake said.

The Fund’s investment mandate is to achieve an average annual return of at least the consumer price index plus 4 per cent to 5  per cent annually over the long term, with an acceptable but not excessive level of risk.

Meanwhile the Fund’s Infrastructure and Timberland asset class, valued at $16.3 billion and 8 per cent of the portfolio, would focus on Australian agriculture and timber assets which had increased in attractiveness since the Fund’s inception, Brake said.

Australia is more attractive now

“We’ve added some Australian-based infrastructure to our portfolio recently. The domicile of Australia is more attractive to us than 15 years ago [because of the] regulated arrangement and the backyard argument. We are interested in these types of assets as well.”

The Future Fund is responsible for the investment stewardship of other government funds including the Medical Research Future Fund ($22.3 billion) the DisabilityCare Australia Fund ($14.9 billion) the Emergency Response Fund ($4.8 billion), the Future Drought Fund ($4.7 billion) and the Aboriginal and Torres Strait Islander Land and Sea Future Fund ($2.2 billion), taking total assets under management to $252.5 billion.

It currently ranks 16th in the top 100 list of sovereign wealth funds by total assets, led by Norway ($US1.4 trillion) and China ($US1.2 trillion).

Future Fund chair and former federal treasurer Peter Costello said the Fund had been carefully positioned to successfully navigate challenges thrown up by the Covid-19 pandemic to deliver “exceptional returns”.

“We have come through a period of exceptional stimulation through monetary policy, This policy will have to come to an end. The adjustment will be significant,’’ he said.

He said the board’s focus was to position the Fund’s portfolio to be “resilient to an environment of greater uncertainty” including lower returns than recent years.

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