Despite beating its 10-year performance benchmark, Australian’s Future Fund fell short of its target for the past financial year amid tricky conditions (see table 1 below). Moreover, the A$123 billion ($92.5 billion) state investor sees difficult times ahead and is set to boost its focus on private markets, the brightest spot in its portfolio in the past 12 months. 

The return for the year to June 30 was 4.8% as against the 5.5% target. Managing director David Neal said the below-par performance was due to continued uncertainty and the net 2.7% fall in global stocks in Australian dollar terms.

Still, the fund posted an annualised return of 7.7% over 10 years against the benchmark of the Consumer Price Index (CPI) + 4.5%, which works out at an annualised 6.9%.

Table 1: Future Fund performance at June 30
  Return pa (%) Target return (%)
Ten years 7.7 6.9
Seven years 10.7 6.9
Five years 10.2 6.8
Three years 11.4 6.3
One year 4.8 5.5

However, the fund’s executives predict difficult times ahead in the search for yield. “The next 10 years look like a challenge for us,” said Neal in a briefing yesterday. Global investors face persistently high debt levels, which – along with demographic changes and globalisation – have been exerting quite powerful deflationary forces, he added.

He echoed a growing concern among institutions that monetary policy is losing its impact in terms of stimulating demand. “Monetary policy has been extraordinary for an extended period of time, to address those deflationary forces, but despite this, growth has been a little tepid and inflation has been non-existent really, in many parts of the world.

“There’s a growing sense of unease across the investor landscape that monetary policy is waning in its effect,” added Neal, “and the concern for us is that creates some fragility to any future shock.”

In light of the low-return environment and the risks it sees, the Future Fund has been gradually reducing risk in the portfolio, as reported.

It has adopted a “moderately conservative position”, said Neal. Australian equities were lacklustre over the last financial year, with a 0.2% return, he noted, and much of the 4.8% return was down to a very successful year for the private market portfolio. 

This is an area where the fund’s managers are putting a lot of focus, he said, taking the view that public market returns are likely to be subdued. They are increasingly seeking “genuine skill-based, niche or opportunistic returns that are diversifying from that broader context”.

Future Fund has also taken advantage of private lending opportunities around the world, as banks’ balance sheets remain constrained and regulation curbs their ability to lend. It categorises these assets under 'debt securities', a portfolio that has grown to 11.6% from 9.8% of total AUM in the year to June 30 (see table 2 below).

Like Neal, chairman Peter Costello highlighted the dislocation in markets as a cause for concern: “There will be very difficult trading conditions looking forward. Returns are at historic lows when you look at 10-year bond yields, 30-year bond yields and cash rates. 

“This is a very difficult environment,” he added, “which means we are looking very carefully at ways to maximise yields, while not chasing the risk curve too far.”

Table 2: Future Fund asset allocation
  30-Jun-15   30-Jun-16  
Asset Class A$ million % of fund A$ million % of fund
Australian equities 7,957 6.8 7697 6.3
Developed Markets 20,629 17.6 18,712 15.2
Emerging Markets 11,034 9.4 8,960 7.3
Private Equity 12,609 10.8 12,798 10.4
Property 6,980 6 8,559 7
Infrastructure, timber 8,751 7.5 8,243 6.7
Debt securities 11,467 9.8 14,275 11.6
Alternatives 14,904 12.7 16,849 13.7
Cash 22,890 19.5 26,700 21.7
Total 117,222   122,792  
Source: Future Fund. Data may not sum due to rounding