The $240 billion Future Fund has cautioned investors to consider their FX exposure as geopolitical turmoil threatens to derail US exceptionalism.
“The global institutional order is changing,” Future Fund chief investment officer Ben Samild said at a keynote session at the 2024 Fiduciary Investors Symposium in the Blue Mountains.
“The stability of the post-Bretton Woods II institutional framework may be fracturing. Portfolio construction against this backdrop is considerably more challenging and you have unsatisfactory choices.”
Investors have been rewarded for sending significant capital flows to the US where markets have performed strongly over the past decade, while the US dollar has simultaneously acted as a hedge in times of volatility.
However, several forces now threaten that status quo, including China’s waning appetite for US dollar assets and large foreign exchange US dollar-denominated reserves in response to the Trump administration’s hefty tariffs.
“Is the global savings flywheel reversing? The US has captured 70 per cent of global savings – Europe, Japan, the most important surplus countries, Canada, Australia,” Samild said.
“I think China’s out. Many of the policies that have been announced or discussed make it more difficult for capital providers in all these countries.”
Samild also pointed to section 899 in Trump’s “big, beautiful bill”, which would potentially hike taxes on Australian asset owners’ US income to a maximum of 70 per cent.
“Taken literally, it makes many asset classes in America very difficult to invest in,” he said.
“I don’t think they’re going to do this, just to be clear, but one interpretation of that section would make you very concerned, and you would add a higher risk premia to US investing.”
The Taiwan dollar has surged in recent weeks to record highs, leading to increases in the Korean and Singapore currencies. Such a wave of US dollar selling across Asia raises questions about the decades-long trend of those countries investing their trade surpluses in US assets – a key plank of Bretton Woods II, which describes the post-1970s international monetary system.
“We think FX is the most important lever in the portfolio,” Samild said.
“It’s the least spoken about but the most important one. It changes your returns over time more than any, and it has more nasty trade-offs that you really have to think through than any of the other things that we do.”
Samild said the Future Fund views currency as a separate asset class that should be managed at the total portfolio level and it relies on three fundamental beliefs:
- The Australian dollar will (on average) exhibit pro-cyclical behaviour against a basket of developed market currencies.
- Australia will (on average) have somewhat higher real interest rates than other developed markets.
- Developed market FX is a valuable source of diversification, particularly in stressed environments, and for liquidity risk reduction.
Samild said those assumptions had been valid for decades, but may not be in future.
“That has definitely been true for most of Australian free floating financial history,” he said.
“That feels less true today than it has at any other point that I’ve been working – I’ve been working 28 odd years.”
The Future Fund constructs its FX basket by assessing its physical portfolio, return versus drawdown defensiveness, imported inflation hedging, market liquidity and size, systematic starting point, its secular view, and current neutral basket.
“We have changed our duration exposure,” Samild said. “We changed our strategic FX, we changed our tactical FX. You have to be really careful about correlation.”
“We think we might be in a world which is even harder than the one I’ve described, because our running correlation, from an Australian dollar perspective, might turn the other way, but your tail correlation in an event may still be Australian dollar down. It’s very hard to take on this correlation risk blind now.
“So maybe you buy gold, maybe you buy alternative reserve currencies, maybe you use hedge funds instead, maybe you use long vol, maybe you use options yourself. Maybe you do some version of all of this. But this is all more challenging than reliable, scalable, rewarding portfolio anchors like US duration and FX have been.”
