Raphael Arndt

The Future Fund will deploy capital to early-stage companies despite warning that persistent high inflation will continue to create a challenging environment, especially for risk assets.

Australia’s $206 billion sovereign wealth fund has begun appointing external active managers six years after going all in on passive strategies, including venture capital specialists it says has earned its trust.

“We continue to invest in early stage venture because if anything its becoming more attractive – capital is drying up and it’s actually getting cheaper and more competitive,” Future Fund CEO Raphael Arndt tells Investment Magazine. “We have high conviction we are investing with the best managers in the world, so we continue to do that.”

Future Fund lists 15 external managers in the venture capital asset class on its website, including Australia’s Blackbird Ventures alongside Silicon Valley stalwart Sequoia Capital and Chinese firms FountainVest and Xiang He Capital.

The continuing foray into early-stage equities comes despite its thesis that inflation would be “sticky and sustained”, revealing a more bearish outlook than some global peers. “Favourable investment conditions that drove markets in recent decades have been undergoing profound changes,” Arndt says. “Markets have been under-pricing the significant economic and geopolitical risk that we have anticipated. “The … portfolio is positioned moderately below neutral risk settings at a time when the economic outlook and the direction of inflation and interest rates make investment returns less certain.”

The sovereign is also turning to fixed income, including investment-grade credit and “boring old bonds”.

The comments followed the Future Fund’s reporting of a 6 per cent return in FY23 in a portfolio update on Wednesday. Arndt describes the result as “solid” in the circumstances but it under-performed the fund’s target of 6.9 per cent a year.

It has returned 8.8 per cent a year over the 10-year horizon and has grown its initial A$60.5 billion ($43.3 billion at April 3 2006) endowment from the Australian government almost fourfold since, with no additional contributions.

He says the fund will continue to add more external active managers to give in an edge in a challenging market. While Ardnt makes clear he wasn’t moving entirely out of passive mandates, the comments reflect a major strategic re-direction for the Future Fund, which in 2017 placed the vast bulk of its equities portfolio into low-cost index strategies, concluding it was increasingly difficult to justify the fees asked by active managers, especially in Australian domestic equities

“This is a multi-year strategy and we haven’t lost conviction in that,” he says. “You don’t move $250 billion worth of capital in six months. We have been looking at active management in global equities and put a couple of active managers on where we think there are pockets of opportunity for active managers and we can do that at meaningful scale.”

The sovereign has also commenced a project of more actively managing and monitoring liquidity, centralising and establishing a formal treasury function staffed by three full-time equivalents, and investing in software upgrades.

Earlier this month, it announced Ben Samild, its former deputy chief investment officer, as the permanent CIO, a role Arndt had been performing since the departure of Sue Brake in June 2022.

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