Australia's Future Fund on Wednesday reported a 15.4% gain for the year ended June 30, even as the sovereign wealth fund trimmed risk from its portfolio in anticipation of tougher times ahead.
Continued monetary policy stimulus by major central banks allowed the fund to post “very strong returns” over the past year, lifting the portfolio's value to A$117.2 billion ($89.7 billion), said Peter Costello, chairman of the Melbourne-based sovereign wealth fund, at a briefing.
But with the U.S. Federal Reserve poised to lead the way now in tightening monetary policy, Mr. Costello said such returns far in excess of the fund's target of 4.5 percentage points above the consumer price index will have to help tide over the portfolio during tougher times to come.
“It's difficult to see that there's much fuel left in the global monetary policy tank,” and after years of elevated gains for risk assets, investor sentiment is looking increasingly fragile, agreed David Neal, the fund's managing director, in the same briefing.
As a consequence, the investment team has lowered the portfolio's historically high risk exposures of two or three quarters ago to levels of risk that are normal or slightly below normal, Mr. Neal said.
The fund ended the latest 12-month period with roughly 20% of assets in cash, having shifted more than eight percentage points in allocations there from public equities.
As of June 30, Future Fund reported 19.5% of its portfolio in cash, up from 11.2% a year before. Allocations to public equities, meanwhile, tumbled to 33.8% from 42.2%. Within that category, developed markets equities accounted for 17.6% of the total portfolio, down from 23.1%, while emerging markets equities edged down to 9.4% from 9.7%, and Australian equities fell to 6.8% from 9.4%.
Private equity rose to 10.8% from 8.3%, although the Australian dollar's weakening against its U.S. counterpart accounted for the bulk of that gain on the U.S.-focused private equity portfolio, Mr. Neal said.
Allocations to hedge funds fell to 12.7% from 13.5%, while the fund's holdings of debt securities — composed predominantly of higher-risk credit and private lending — dropped to 9.8% from 11.2%. Elsewhere, infrastructure and timberland declined to 7.4% from 8.2%, while property rose to 6% from 5.4%.
For the most recent quarter, the value of the fund's portfolio rose by only 0.2%, with allocations to public equities dropping by 4.7 percentage points and cash increasing by 4.3 percentage points.
Despite the tougher outlook, Mr. Neal said his investment team is still finding “a lot of interesting opportunities” to invest, although the most attractive are ones which demand work to turn them into “high-quality assets.”