Australia's Future Fund plans to selectively raise its exposure to emerging markets, pointing to the expansion of that universe. It is also looking to make more direct investments into private equity – to the extent that it can, given that it must use external managers to run all its portfolios.
The A$85 billion ($78.1 billion) sovereign wealth fund has thus far concentrated most of its asset allocation in developed markets, but that is changing.
Chief investment officer David Neal* says the fund has a business strategy to build up its “bench strength with the aim of being a very strong, competent investor in EMs”.
“We readily admit that through the first six years of our existence, we have been largely focused on opportunities in developed markets, because there have been lots of them,” notes Neal. “And we had the expertise to benefit from them.
“Looking forward, we need to recognise that the investible universe is expanding and we need to participate in that. But we’re not going to buy buildings in China without being confident that we know what we’re doing.
“It takes time to get to that stage,” he adds. “If we can find managers who can do a good job of that, we will use them.”
Neal stresses the importance of being selective when it comes to emerging markets.
The Future Fund “believes in the secular story of relatively higher economic growth in emerging markets including Asia”, he notes. “But we tend to agree with the view that higher economic growth does not necessarily lead to stock markets going up.”
The most obvious reason for this being if everyone is expecting stock-market growth, “then it’s probably already priced in”. Another reason is that new economic growth requires new capital to support it, meaning there will be “quite a heavy amount of dilution as well”.
“Certainly we don’t believe that just because emerging markets will grow quicker than developed ones, we should blindly invest in EMs and expect a higher return,” says Neal. “We think we should be a bit smarter than that.”
One of the main EM themes the fund plays is that of the rising consumer, he notes, “which we suspect may not be fully priced in”.
“True, a lot of consumer stocks in emerging markets are expensive – maybe too expensive – but you don’t have to invest in EM stocks to benefit from this trend,” he says. “We have a range of mandates that seek to benefit from that thematic that are agnostic as to where they invest.”
The Future Fund is also starting to move into more direct investment in private equity.
While it is mandated to use external firms for all of its portfolio management, its 44-strong investment team nevertheless makes its own decisions in conjunction with those managers.
The fund works with a relatively small number of PE managers and commits to their funds, but also co-invests with them. It takes a similarly hybrid approach to tangible assets such as infrastructure and property.
Neal cites a deal the fund did last year to buy the assets of an Australian listed infrastructure trust, comprising a range of airports. “We did that [deal] ourselves,” he says, but then hired a manager to run the portfolio.
Of course, hiring and retaining good investment talent is a challenge for the Future Fund, just as it is for other institutions – but the Australian entity does have certain advantages, argues Neal.
“We believe we’re broadly competitive in terms of pay, but in this industry there’s always someone with a bigger chequebook for smart people who’ve proved themselves.”
“[Aside from remuneration,] we also rely on the clarity of our mandate and sense of purpose," he adds. "The job of people here is to build the best portfolio they can – they don’t have to worry about finding new clients, or servicing existing clients, or about a P&L.”
* See the upcoming (July) issue of AsianInvestor magazine for an extended interview with David Neal.