Future Fund posted an investment return of 10.7% in the 12 months to September 30 during which it continued to raise its exposure to private markets and trimmed its listed equity positions amid a bleak outlook among traditional asset managers.

The Australian sovereign wealth fund’s allocation to private equity stood at 14.8% as of end-September, up from 14.0% just three months before and 11.8% a year earlier. Its allocations to property and infrastructure/timberland also rose in the latest quarter – to 7.0% from 6.4% and to 8.2% from 8.0%, respectively.

By contrast, the Future Fund said it had pared its investments in bonds and stocks as rising global interest rates and potentially higher inflation posed challenges to its long-term outlook. Interestingly, though, its cash holdings have fallen to 14.4% as of end-September from 15.1% in June and 18.9% a year earlier. 

“Inflationary pressures are gradually building in the US and markets continue to respond to rising interest rates," Peter Costello, chairman of the fund, said.

Peter Costello

“While the short-term economic outlook remains reasonably positive,” he added, “we remain cautious about the longer-term outlook, the impact of geopolitical and trade tensions and the potential for shocks to markets.”

That has been reflected by this year’s plunge in emerging market stocks and the US equity sell-off that started in mid-October.

Other major international investors too have been taking public market risk off the table. For instance, the Healthcare of Ontario Pension Plan has this year been reducing exposure to listed equities, and particularly US stocks, noted Jeff Wendling, chief investment officer of the C$78 billion ($60 billion) fund.

And according to Bank of America Merrill Lynch’s fund manager survey for October, released last week, global growth expectations among asset managers are at their lowest since November 2008 – that's two months after the collapse of Lehman Brothers.

PRIVATE MARKET PREFERENCE

Future Fund's push into private markets, which it flagged three month ago, reflects a global trend for large public asset owners to build their exposure to illiquid investments, particularly tangible real assets, in search of diversification benefits and stable long-term returns.

This was underlined by the findings of a global survey of sovereign wealth funds, public pension funds and central banks published in June by the Official Monetary and Financial Institutions Forum (OMFIF). 

Seventy percent of those surveyed globally said they plan to invest more in funds in infrastructure in the next 12 to 24 months, with none looking to reduce their exposure. In the case of real estate, 45% said they planned to increase their allocation and only 12% said they wanted to reduce it.

In keeping with that Canadian state pension funds have previously told AsianInvestor that they might look to increase their exposure to Asian property markets. 

Also, Japan’s huge Government Pension Investment Fund issued its first global mandates for infrastructure and real estate in January and September, respectively. The ¥156.4 trillion ($1.39 trillion) fund is also working on selecting managers for its first moves into private equity.

A wall of money is expected to follow suit from other Japanese asset owners, as these typically conservative institutions move to ramp up exposure to international private assets.