Future Fund raises returns with fewer managers

The A$165.7 billion ($133.7 billion) Australian sovereign wealth fund saw its assets jump 11.5% in 2018/19 as it successfully boosted its long-term returns.
Future Fund raises returns with fewer managers

Less is more. This appears to be the case at Future Fund – at least for now – after the Australian sovereign wealth fund posted an impressive set of performance figures, having recently cut the number of external managers it uses.  

In an annual report published on Friday, Future Fund said its 10-year returns leapt to 10.4% per annum in the year to June-end from 8.7% in 2017/2018 and 7.9% in 2016/2017.

However, in a portfolio update published on Monday, Peter Costello, chair of the Future Fund Board of Guardians, cautioned that the improving trend might not last due to a range of challenges including ageing demographics and high debt levels.

“The Board remains alert to the uncertain outlook for global growth and the potential for shocks to markets while recognising that accommodative monetary policy continues to support asset prices,” Costello said.

Future Fund returns 2019
Source: Future Fund (Click for full view)

Future Fund added that its assets at the end of September edged up further to A$165.7 billion ($133.7 billion) after an 11.5% gain in the 2018/19 financial year to June 30.

The growth in Future Fund’s assets coincides with a reshuffling of its external managers, with 12 asset managers retired and only seven added to run its portfolio during the year (See box). That contrasts with 2017/18 when Future Fund added 12 managers and fired about seven.

Terminated asset managers: 12

Developed market equities: MFS investment management

Emerging market equities: Mondrian investment partners, Trilogy global advisors

Private equity/venture capital: Insight Venture Partners

Unlisted real estate: DEXUS Funds Management, TIAA-CREF/TIAA Henderson Real Estate

Listed real estate: CBRE Clarion Real Estate Securities

Unlisted infrastructure & timberland: QIC Global Infrastructure

Alternatives – multi-strategy/relative value: Arrowgrass Capital Partners, BlackRock Alternative Advisors, PAG Holdings Limited

Alternatives – macro-directional: Brevan Howard Asset Management

Added asset managers: 7

Private equity/buyout: Citic Capital, Siris Capital

Listed real estate: State Street Global Advisors (replacement)

Listed Infrastructure & timberland: State Street Global Advisors

Alternatives – macro-directional: Goldman Sachs Asset Management L.P., Athanor Capital L.P. (1 replacement)

Alternative risk premia: Wellington Investment Management

Future Fund's new annual report said it preferred “fewer, more meaningful, relationships with external managers.”

In response to AsianInvestor’s queries on whether Future Fund will continue to engage with a smaller group of external managers, a spokeswoman said, “we adjust the portfolio and the strategies we pursue on an ongoing basis and our manager roster reflects this.”

Peter Ryan-Kane, founder of consultancy PeRK Advisory, said the move to trim down the number of external managers made sense as the people in charge of Future Fund grew more confident with time.

“All funds go through a lifecycle of investing,” he said. “In the initial stages they tend to over-diversify at both the beta and alpha level. Over time [as a] fund's confidence in their investment processes grows, they narrow down strategies and approaches.”


With fewer external managers, Future Fund has also been adding more risk.

Compared with the 2017/2018 financial year, Future Fund’s allocations to developed market equities, emerging market equities, private equity and property rose between one to three percentage points, while that of alternatives and cash dropped.

Future Fund’s cash holdings slid by three percentage point to 12% at the end of June. Its allocation to emerging market equities, in contrast, swelled by the same amount to 10%, followed by private equity, which was up by two percentage points at 16%.

The reason for a larger emerging market equities allocation stemmed from attractive valuations.

Given the inflated valuations of private companies, Future Fund continued “to look for highly disciplined managers with (among other attributes) experience in generating strong returns in volatile economic environments and which provide good access to co-investment opportunities,” the annual report added.

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