David Neal, chief investment officer of Australia's A$97.6 billion (US$90.6 billion) Future Fund, says his fund's absolute-return focus, not bound by fixed strategic asset allocations or benchmark constraints, could help it clear a challenging return hurdle over the coming decade.
It won't be easy.
In a recent interview, Mr. Neal said his Melbourne-based team's working thesis for the economic outlook is that policymakers will succeed in engineering a soft landing — avoiding major shocks but leaving the global economy facing a slow healing process that will offer up “pretty uninspiring returns” for investors along the way.
The 2006 legislation establishing the Future Fund — to help cover future unfunded superannuation liabilities — set an annualized long-term return target for its investment portfolio of between 4.5 percentage points and 5.5 percentage points above Australia's consumer price index.
At the moment, Mr. Neal said, there's still “enough from markets, and from (idiosyncratic) pockets of opportunity, for us to have a reasonable chance — not a strong chance — of achieving our mandated return objective.” If the fund's 45-person investment team manages to do so, a good deal of the credit, he believes, will be due to decisions made in 2007 by Future Fund's board on how to structure the fund's investment program and governance.
“We sort of said, "Let's see if we can do this thing without a benchmark, without a fixed strategic asset allocation and how we would go about it,'” with a focus on absolute return predicated on a strong alignment of the management and the board, Mr. Neal said.
Mr. Neal, who moved to the Future Fund CIO role from his prior post as head of consulting with Watson Wyatt Australia, said the board acted on his “one-team, one-portfolio” proposal, aimed at breaking down the asset-specific silos separating team members in favor of rewarding everyone on the strength of the overall portfolio's returns.