Strong returns from listed equities and alternatives, and moves to reposition its portfolios with greater resilience, have helped the $225 billion Future Fund post a 9.1 per cent return for the year ended 30 June 2024, exceeding its return target by 130 basis points for the year.
Future Fund chief investment officer Ben Samild told a media briefing that the past 12 months had been “one of our better ever years for alpha production in the portfolio”.
“We have relative to most peers a low weighting to listed equities, which were obviously the main return-driver globally for risk assets,” Samild said.
“So given those initial portfolio settings, we were very pleased to be able to generate the returns we generated. They came largely due to outcomes [from] both the beta and the alpha portion of our listed equity portfolio; some very strong returns from our hedge fund and credit portfolio; as well as some of the changes we’ve been making over the years to add resilience to our portfolio through things like commodities and the FX baskets, which were accretive to returns.”
While the fund remains ahead of its return target since inception in 2006, its CPI-plus return target means that as inflation spiked the fund has struggled to keep pace with its target returns over three- and five-year periods. Over three years the fund returned 4.5 per cent a year versus a target return of 9.3 per cent a year; and over five years it returned 6.7 per cent a year versus a target of 7.9 per cent a year.
“Essentially our benchmark ran ahead of us in a fairly dramatic and accelerated way through the post-COVID inflationary experience,” Samild said.
“That came, obviously, with a change in the interest rate complex and the initial response from risk assets was negative, as you would expect. [It was] just a difficult time to be an asset owner and to generate positive returns for risk assets. Inflation is slowly normalising, markets have normalised, and our returns obviously have been above mandate again for this year.
“Over seven and 10 [years] we’re certainly over our target return – a seven-year return of 7.8 percent per annum versus a target of 7.3 [per cent]; and a 10-year return of 8.3 versus 6.9 – so we’re still tracking very well against our long-term mandate.”
| Future Fund returns and target benchmarks | ||||||
| 2024 | 2021 | |||||
| Return (% pa) |
Target (% pa) |
Relative return (%pa) | Return (% pa) |
Target (% pa) |
Relative return (%pa) | |
| From Inception (May 2006) | 7.7 | 7.0 | 0.7 | 8.4 | 6.6 | 1.8 |
| 10 years | 8.3 | 6.9 | 1.4 | 10.1 | 6.1 | 4.0 |
| 7 years | 7.8 | 7.3 | 0.5 | 9.9 | 5.9 | 4.0 |
| 5 years | 6.7 | 7.9 | -1.2 | 9.9 | 5.9 | 4.0 |
| 3 years | 4.5 | 9.3 | -4.8 | 10.5 | 5.7 | 4.8 |
| 1 year | 9.1 | 7.8 | 1.3 | 22.2 | 7.8 | 14.4 |
| Source: Future Fund Portfolio Updates 30 June 2024, 2021 | ||||||
The FY24 performance means investment returns have added about $18.8 billion to the value of the fund, taking the value added from investment returns since inception in 2006 to $165 billion.
Hedge fund tales
In a statement, Future Fund chief executive officer Raphael Arndt noted that the organisation has worked over the past four years to make its portfolio “more robust to these events, with relatively low exposure to fully priced equities, low exposure to interest rates and a range of inflation hedges in place”.
“In this environment, I consider the annual return of 9.1 per cent to be very strong,” Arndt said.
“In a year where equities were the only strongly performing traditional asset class, many of our positions, and in particular our hedge fund portfolio, really delivered.”
The hedge fund strategy consists of several buckets – market-neutral, diversifying, defensive and other alternative risk premia funds – but Samild said the fact that they all posted strong returns this year was “very unusual”.
This means that all sorts of managers – quantitative, discretionary, stock-picking, and managers who trade with different time horizons – all performed well.
“We wouldn’t expect that every year clearly, I mean, it’s [the portfolio] almost deliberately built for that not to happen, but sometimes it does. But we think the environment for skilled managers is a good one,” he said.
“They have more degrees of freedom. There’s much more dispersion within macro economies, within interest rate markets, across curves, across currencies and within equity markets and across equity markets. So you can just more easily build a well risk-managed portfolio when you have more levers to pull.”
A significant part of Samild’s tenure with Future Fund was running the alternatives portfolio before he became CIO. He said crafting a well-rounded hedge fund mix takes time and the sovereign fund has been doing that for the past 15 years.
“We think it’s very diversifying. It’s largely liquid and it’s a very useful portfolio tool,” he said.
“To build this really significant allocation to hedge funds, to our view that you need to be doing that over a long time and really understand the hedge fund ecosystem extremely well.”
| Future Fund asset allocation | As at June 30 | |||||
| Asset class | $m (June 2024) |
2024 | 2023 | 2022 | 2021 | % change 2021 – 2024 |
| Australian equities | 23,116 | 10.3 | 8.6 | 8.1 | 8.5 | 1.8 |
| Global equities | 60,670 | 27.0 | 21.8 | 20.4 | 27.3 | -0.3 |
| – Developed markets | 46,829 | 20.8 | 15.9 | 15.0 | 18.2 | 2.6 |
| – Emerging markets | 13,841 | 6.2 | 5.9 | 5.4 | 9.1 | -2.9 |
| Private equity | 32,668 | 14.5 | 16.5 | 17.2 | 17.5 | -3.0 |
| Property | 12,042 | 5.4 | 6.3 | 6.8 | 5.9 | -0.5 |
| Infrastructure and timberland | 22,352 | 9.9 | 10.0 | 9.5 | 7.4 | 2.5 |
| Credit | 24,825 | 11.0 | 8.6 | 8.1 | 6.6 | 4.4 |
| Alternatives | 34,092 | 15.2 | 17.0 | 17.8 | 13.5 | 1.7 |
| Cash | 15,147 | 6.7 | 11.2 | 12.1 | 13.2 | -6.5 |
| 224,912 | 100.0 | 100.0 | 100.0 | 100.0 | ||
| Source: Future Fund Portfolio Updates 30 June 2024, 2023, 2022, 2021 | ||||||
Higher for longer
Samild said the fund has been public in its view that there was a strong probability of inflation being higher and more volatile in future than it has through the past 20 to 30 years, and the impact this would have on asset prices over time. This view obliged the fund to make its portfolios more resilient, he said.
“The way we invest is we think about the world as it is, how it could be, and the probability that the world will shift into those different places,” he said.
“We think about the impact on assets in those different secular environments, and then we think about the kind of portfolio we would want to hold given those environments.
When you increase your probability to a world that has higher inflation and more macro volatility, you want to hold a different portfolio to make you more resilient to that environment.”
Samild said there are “lots of different subtle sort of things we do throughout through the entire portfolio to make the whole thing more resilient”.
This included changes to its currency basket; explicit inflation protection; a different way of holding interest rates and different level of interest rates; holding different assets – Samild nominated its domestic infrastructure exposure as an example of that; holding different commodities; as well as thinking about underwriting, contracted revenues and regulatory risk “in different way”.
“It’s no one thing. It’s considerably layered throughout all the decision making that we do,” he said.
Huge thematic
Arndt said that over the past four years “the equivalent of the full value of the portfolio has been turned over to align the portfolio with our revised thinking”, including $50 billion of changes in the past year alone.
Future Fund board of guardians chair Greg Combet said in a statement that a priority for him is to build on the fund’s existing investments in infrastructure assets such as airports, ports, renewable energy. telecommunications and data centres.
Samild said the fund would be opportunistic in its approach.
“We really think about this as on an opportunity-by-opportunity basis, and if that is the best use of our capital from a risk return basis, then that’s where the capital will go,” he said.
“Domestic private market investing is definitely something that we do a lot of already, and that has some attractive portfolio features. It has a direct link to our own inflation-based mandates, and we hold it in our own currency, which just makes it easier to build a portfolio around.”
Samild said there is “a reasonably considerable capex pipeline” for the fund’s existing infrastructure assets, so as we look to the sensibility of funding that capex, that’s another obvious place for capital to flow to”.
He said funding the energy transition is “clearly an enormous capital thematic” that will drive the volume and the direction of capital flows. He said the numbers are “almost incomprehensible,” but “is in the trillions [of dollars] to solve the energy transition”.
“It would be stunning if there weren’t very considerable opportunities to provide capital into that,” he said.
“I’ve been very strong with the team that we should be exceptionally at understanding the opportunities and impacts in this space from this enormous capital event.
“I would say that technology broadly, and more recently AI more narrowly, are similar and actually sometimes overlapping capital thematics and capital events that we also need to understand really well.”
