Australia’s A$205.1 billion ($150 billion) Future Fund posted a negative 0.9% return in the 12 months to the end of June, its first yearly loss since the global financial crisis of 2008-2009. But the sovereign wealth fund said shifting into more defensive portfolio positions and selling down international private equity and alternative asset positions in favour of more domestic exposures shielded it from an even worse result.

“In terms of the one year result, we have seen unprecedented market conditions. Preserving capital in this environment has been difficult,” said Sue Brake, the acting chief investment officer of the Future Fund.

The scale of volatility has been clear to all, she said, with the Australian stock market falling by over a third in March this year.

Sue Brake

Future Fund does not disclose the returns for individual asset classes, but market data shows that for the 12 months, the Australian Securities Exchange was still down over 10% at the end of June, which will have contributed largely to the fund's negative performance.

Naturally, Brake was keen to stress that the SWF has its eyes on the horizon when investing. “Strategies designed for the long term often come with a willingness to absorb shorter-term negative returns," she said. "So it’s a pleasing result that we have come in broadly flat for the year.”

The defensive positions in the portfolio “have performed as we expected them to, and we were pleased with a more muted drawdown than might otherwise have been the case,” Brake added. 

The defensive strategies employed are the same levers that other large asset owners use, including managing currency exposure as a defensive lever and managing duration and interest rate exposure, said Brake.

"We also use the alternatives portfolio in a defensive way, with mandates that have been specifically designed to hold their value in a market downturn. We are pleased with the way those levers performed during this period in dampening that drawdown. It makes us comfortable that we are not going to have liquidity issues."

INFRASTRUCTURE SELL-OFF

The fund’s liquidity and long-term returns were also materially affected by a rebalancing undertaken within its private equity (PE) investments, with it having reduced its exposure to international growth and buyout managers following a period of strong performance.

Future Fund also completed the sale of some infrastructure assets including the UK's Gatwick Airport, deploying some of that capital into new infrastructure themes including fibre and data centres in Australia and offshore.

The sovereign wealth fund still holds significant infrastructure investments in airports, but Brake would not be drawn on whether the fund would be looking to offload these, given that the sector has been severely affected by the global pandemic.

“The investments we have sold have been infrastructure but also property and a fairly significant rebalancing of our private equity portfolio. All up, through the PE secondary sale, we have shifted about A$6 billion worth of assets,” said Brake.

Brake said the rebalancing was a critical transaction, because "it was an important test of our ability to access that liquidity." She stressed that PE was still an essential part of the portfolio. "One of the reasons it had become a large part of the portfolio was outperformance, and another reason has been currency movement."

The rebalancing, she said, “was really strategic thinking about the overall balance of PE and venture capital. What’s interesting is that over the one year, the strong PE performance is a result of the growth in VC (venture capital) assets. So it was about getting a better balance at a total portfolio level and a better balance with the private equity portfolio."

Despite the short term drawdown, the fund's long-term return is still comfortably above benchmark. The 10-year return is now 9.2% compared to the target return of 6.1%.

However, Brake said, "this is a time when we need to put the “without excessive risk” part of our mandate at the forefront of our thinking. There is so much uncertainty about how this is all going to play out. It’s going to be harder to achieve good investment returns going forward, so as a result, we are positioned below our neutral risk setting".

Having said  that, Brake claimed that "it’s a very interesting time to be an investor". She said there is the potential for the Future Fund to invest in some of the more distressed sectors - private debt, emerging market debt - that other asset owners may have been forced to sell out of.

Future Fund Asset Allocation at June 30, 2020