After doubling its cash allocation last year, Australia’s sovereign wealth fund took up an even more defensive position as of the end of the first quarter of 2016, amid continued concerns about global stock markets. 

The A$117 billion Future Fund said the outlook remained poor and has raised its cash position to 22.9%. This came as the institution announced its results for the year so far last Friday, indicating a first quarterly loss since 2012. In 2015 it had increased its cash position from 10% to 20%, a level that had not been anticipated when the fund set its budget for the year. 

Managing director David Neal spoke of an “uncertain future”. “During 2015 we gradually reduced the overall level of risk in the Future Fund portfolio, and we have continued to do so,” he said. “We are comfortable our current positioning is appropriate given the uncertain environment and our belief that we should only take on risk where the potential rewards justify it.”

Chairman Peter Costello added that the fund anticipated lower prospective returns on risk than in the past few years. "We are also conscious that monetary authorities, having stimulated so much, have less flexibility now to respond to future weakness. Given this, we have less risk in the Future Fund than we would under more normal circumstances.”

The fund has exceed its target return since inception in 2006, and has doubled in size from its initial funding level of A$60 billion. But this year is shaping up to be its most challenging; returns for the financial year to date (from June 2015) are 4.1% below target. 

Returns

Period to 31 March 2016

Return per annum

Target return (CPI+4.5%)

From May 2006

7.4%

7.0%

Seven years

10.7%

6.8%

Five years

9.5%

6.5%

Three years

11.3%

6.4%

One year

0.4%

6.1%

Financial year to date

0.2%

4.3%

Quarter

-0.9%

1.2%

 
Developed-market equities now comprise 15.2% of the fund, down from 17.2% at the end of 2015. "We’ve reduced our equities portfolio quite a bit, but that is just a part of the activity that has gone on inside the portfolio,” said Neal. “We have also sold out of A$15 billion worth of investments, in public and private markets."
 

Asset allocation

31 March 2016

Asset class

A$ million

Percentage of fund

Australian equities

7,629

6.5

Global equities

Developed markets

Emerging markets

26,493

17,899

8,594

22.6

15.2

7.3

Private equity

11,474

9.8

Property

8,316

7.1

Infrastructure and timberland

8,330

7.1

Debt securities

13,314

11.3

Alternative assets

14,938

12.7

Cash

26,885

22.9

TOTAL

117,378

100.0

The fund’s investment team does not rule out moving back into the markets, but Neal said that would depend on a more positive environment. "We are well positioned to increase our exposure to risk assets. We will continue to work with our external managers to construct a diverse portfolio that is robust to an uncertain future."

Neal stressed the importance of risk management to the fund, which received an Institutional Excellence Award from AsianInvestor in December. “There’s always risk," he said, but “what’s a little different now, and what makes us cautious, is the expectation that we will not be getting adequate reward for those risks."

The Future Fund is scheduled to start drawing down in 2020, but Costello said the board was already in talks with the government to formulate a long-term plan. “We are thinking carefully about how to make sure the Future Fund has a permanent life past 2020.”