As Future Fund approaches its 16th anniversary, the sovereign wealth fund has renewed its investment strategy as institutional investors globally face a world altered by the pandemic.
“Our CEO likes to say that we're at the gangly, teenager stage, but it just means that there's some development we could do in terms of maturity,” David George, deputy chief investment officer for public markets told AsianInvestor.
“For [the past] five years, we’ve grown so quickly. We are taking stock of this maturing organisation to look at how we can turn into an institution, acknowledging that it's gotten a little bit bigger, from really less than 100 people, probably five or six years ago, to something more like 350 people in and around the office – there’s some change that needed to really be embedded in,” he said.
Aside from the fund’s size, the pandemic also played a part in its decision to launch a new strategy, George said.
“There were lots of trends that were moving slowly but moved faster around Covid. There was also that acknowledgement that quite a number of things in the economy, such as debt levels, and politics and other things that would be a bit different going forward,” he said.
“We recognised the opportunity, once we got through the crisis phase in this past year, to do this really deep introspection and develop an updated investment strategy, facing not just the world that not only Covid is impacted, but also lower interest rates and perhaps more expensive assets around the world, and how we were going to achieve our mission and mandate,” he explained.
Future Fund, which has A$247 billion ($177 billion) of assets under management, has target benchmark returns of the year’s consumer price index (CPI), plus 4-5%.
The new investment model involves a new investment order pyramid-shaped framework that considers geopolitics and politics as its base, followed by economies and extreme policy responses to issues like inflation, fiscal policies, and finally market movements such as price volatility.
Future Fund, which won the AsianInvestor Institutional Award for Sovereign Wealth Fund at the 2021 Institutional Excellence Awards, will also look towards portfolio opportunities that contribute defensiveness, diversification and inflation protection.
INTEREST RATE CONCERNS
Like all institutional investors, George is keeping an eye on impending interest rate hikes from the Federal Reserve, but it is perhaps the muddy communication from the Fed that is keeping investors on their toes.
“No asset loves interest rate hikes, for the most part. And so you could say that's a headwind without question,” he said. “Equities will do better if the communication effort in terms of where we're trying to get to, how this will manage inflation, and other issues that impact the valuation of equity markets. I think the better they do, the more able equity markets and other markets will be to absorb that level of hikes.”
“I think the argument would be that it's justified in terms of the inflation environment. Usually, it’s mistakes in policy that tend to surprise markets and dislocations, and I'm not sure that there'll be a lot of views about where the Fed is and whether they're making mistakes, but if they can communicate their intention smoothly, then in general, I think there’s less likely to be disruptions in the markets.”
The fund has 25% of its portfolio allocated to global equities, and 8% to Australian equities. Of its 25% global equity allocation, two-thirds are in developed markets.
The US stock market has been particularly volatile in recent days, with the S&P 500 falling 4% on Tuesday (January 25) before ending higher. But as a long-term horizon investor, the Future Fund is more concerned about longer-term trends.
Since the market crash in March 2020, the S&P 500 has continued a bull run up until two weeks ago (January 14), and is about 13% up from a year ago, leading some investors to worry that US equities were overvalued.
However, George said that “we don't necessarily have a view that equities are overvalued in a really significant way. We haven’t changed the equity exposure on an overall level in a significant way.”.
“On most of the traditional metrics, particularly if compared across a lot of countries, the US could look more expensive. But there’s justification in terms of where earnings growth levels have been [that explain] why people value it there,” he added.
FIXED INCOME VS PROPERTY
The fund will continue to hunt for property and infrastructure assets because “you can get from properties what you got from fixed income before,” George said.
“There’s often inflation linkage that you can find in some of those assets,” he added. “There's often real stability of cash flows, that you can find in those assets and so that's a way for us to diversify, where we're getting those stable forms of cash flow not just from fixed income.”
That’s not to say the fund has given up on fixed income, as it will continue to use the asset class “as a portfolio tool because they have provided income at some level but also have great defensive characteristics over time.”
However, he caveated that with the current inflationary environment “you’d have to have more questions on how defensive fixed income will be for you, particularly if interest rates are rising.”
Future Fund has 7.2% of its portfolio in debt securities, 8.1% in infrastructure and timberland, and 6% in property.
While it will continue to grow its property investments, it does not have a target for allocation.
“We have a range, we tend to operate across all different asset classes and property is no exception. We know we’ll never hit the exact middle of that range, but we know the direction we want to go and the direction is up,” George said.