The Future Fund reduced its cash component by 2.8 per cent in the 2023 calendar year, redeploying the assets to floating rate credit investments and public equity markets.
The more active participation in markets helped the sovereign fund achieve a return of 8 per cent over the year, putting the 10-year return at 8.2 per cent and above its 6.9 per cent target, according to a public disclosure on Tuesday.
Future Fund now stands at $211.9 billion, with total assets under management (including several smaller government funds) reaching $272.3 billion.
However, it still under-performed the median balanced superannuation fund, which returned 9.6 per cent in the last calendar year, according to SuperRatings.
The result marks improvement from the 2023 financial year where the portfolio returned 6 per cent, which was attributed to higher inflation and geopolitical risks.
The under-performance was interrogated by critics, including Cbus chair Wayne Swan, who took to LinkedIn to question why despite its “zero tax, high illiquidity and high fee advantages”, the Future Fund isn’t outperforming.
“There has been a tendency in the past to view super as the sleepy town of the financial services world. That couldn’t be further from the truth,” the former federal Labor treasurer wrote.
In a media briefing on Tuesday, Future Fund CEO Raphael Arndt said the portfolio was positioned to generate “attractive long-term returns”, while maintaining a “neutral risk” profile.
Credit saw the biggest movement in the portfolio, with the fund increasing its allocation to the asset class by 2.5 per cent in the last year and 3.6 per cent in the last three years.
Arndt said this deliberate lift was funded by drawing down cash and reducing the alternatives exposure moderately. The fund has cut its cash exposure by 2.8 per cent over the year and 10.8 per cent in the last three years.
“The private credit side has been attractive for some years, and we’ve been moving capital in into that area,” he said.
“[Banks] have stepped out of funding some quite attractive businesses for regulatory reasons, the returns to private lenders are quite attractive.
“The other big move during the year was actually investment grade liquid credit, which has repriced particularly off the back of the changing cash rate in the US and the swap rates, and is now quite attractive relative to look forward equity returns.”
Equity price ‘questionable’
Future Fund also increased its allocation to equity in the past year, with global developed markets seeing the most uptick (1.9 per cent), but Arndt said the fund still had concerns about valuations.
“The equities increase was deliberate. It wasn’t just returns,” Arndt said.
“The markets ran really hard in the last quarter.”
The fund’s economic thesis is that high interest rates would be persistent, a more bearish assessment than some analysts and economists who believe the rate cycle has peaked and rate cuts could even be on the horizon.
“The price of equity markets is questionable and at least something that you want to be prudent about,” he said.
“Over the period [to 31 December 2023], it’s become more clear that a recession is less and less likely, particularly in the US, which is the dominant market.
“The economy remained strong and seems to be withstanding the interest rate increases, which by the way, also makes it less likely that interest rate reductions will be required.”
Arndt spoke of resilience building in the portfolio, echoing Future Fund CIO Ben Samild’s comment at Investment Magazine Fiduciary Investors Symposium last November.
“Inflation moving higher, rates following that trend; changes in the geopolitical order; more conflict; the challenge of climate change and re-designing the global energy system, and fiscal expansion are among the big themes we see as the most important influences on our daily investment decisions. Most, if not all of these structural forces have come to pass or are at least developing,” he said.
“In the face of this we have tried to build as much resilience into the portfolio as we can while we try to work through big questions like, what level of real rates can the international economy and global government finances sustain?”
The outgoing chair of Future Fund Board of Guardians, Peter Costello, says he’s confident that the portfolio is in good hands. He is due to step down on 3 February after 14 years with the board.
“I leave with great confidence in the will and ability of the Agency team to continue producing strong returns for the benefit of future generations of Australians.”
