The Future Fund is set to see its asset base expand to over A$200 billion ($158.09 billion) by 2026, after receiving assurances from the Australian government that it will not draw down upon these assets until at least that year.
At a quarterly results briefing held this morning in Melbourne, Peter Costello, chairman of the Future Fund, said the federal government had offered assurances that it will not withdraw any assets from the sovereign wealth fund for the coming nine years. He had previously said the fund needed to know whether the government wanted to dip into its assets or not, as this would have an immediate impact on the fund’s allocations.
Costello now expects the fund’s assets to grow by at least A$67 billion by 2026, from its total of A$133 billion today.
“If there are no withdrawals until that time, the fund could cover all unfunded superannuation liabilities of the country and essentially would continue through the whole of this century,” he noted.
The government’s assurance means the Future Fund will not face any need to increase its short-term liquidity in order to pay out assets soon. Instead it can focus on capturing the illiquidity premium available in longer-term and private assets such as real estate, private equity and private credit.
However, Costello said this did not mean the fund would necessarily increase its exposure to such assets on the back of the extended tenure. “Without this announcement, we would have had to start doing things differently, that’s all,” he said.
The Future Fund made one notable policy change during the last quarter, lowering its target return mandate. Previously it had aimed to gain an annual return of 4.4% to 5.5% over consumer price inflation, but this has been lowered to 4% go 5% over CPI. Costello said that while the new return rate would still be “an extraordinarily challenging target, it is more commensurate with what we see as lower investment returns over the next decade”.
The Future Fund has boasted some notable levels of performance. In the past 12 months it returned 8.7% against a target of 6.4%, while over 10 years its rate of return has averaged 7.9% per annum. Costello would not provide a projection for growth over the coming full year.
The fund remains ahead of its targeted returns in spite of the high cash weighting it continues to hold. In 2015 it doubled its cash allocation to 20% of overall assets, and raised this further to 23% in 2016, amid continued concerns about global stock markets.
“If you look at the cash weight you would get an impression we are more conservatively positioned than we actually are,” he said. “We try to target an overall portfolio risk level, but when you look inside each of our other sectors, we have relatively risky positions relative to what you might see with other institutions as a whole.”
Dangers of accomodation
Looking at the macroeconomic backdrop, Costello noted that some central banks were still being "extraordinarily accommodative". He warned that the longer this situation was maintained, the greater the risk to asset prices suffering drops.
“In Australia, with indebtedness levels at an all-time high, when banks start cutting back on borrowing, asset prices will readjust,” he said. “The only point I’d make is that the longer this goes on, the response [from markets] will be bigger. It’s coming and people ought to start thinking about that."
Neal agreed that while the global economic outlook is healthy, “it’s more the structural backdrop that concerns us”.
Given these concerns, Neal said the broad focus of the portfolio activity in 2017 has been to maintain lower than average portfolio risk exposures while being opportunistic.
“We strive to add additional returns, or reduce risk, by searching for idiosyncratic opportunities. Strategies that have low correlation with traditional risk assets are particularly attractive, such as our venture and growth portfolio.”
For example, the fund has continued to expanding into private equity and Neal said it has an active co-investment platform. It plans to focus on developing exposure via its best ideas and best managers, and is looking for earlier stage investing opportunities in new technologies.
“We do have an interest in the broad innovation theme, so a fair bit of the portfolio is in venture and early stage growth,” he said. “There’s a big disruption theme globally. The point about this type of investment is that while it is early stage and therefore more risky, it is lowly correlated with other assets.”