Executives of Australia's Future Fund said Tuesday they remain cautious about the global market outlook even as they reported a healthy 7.8% return in 2016, bringing the fund to A$127.7 billion ($92.3 billion).
The fund also reported a 2.4% gain for the quarter ended Dec. 31, and a 4% gain for the first half of the fiscal year ending June 30, 2017.
Peter Costello, the chairman of the Melbourne-based sovereign wealth fund, acknowledged in a briefing Tuesday that the “bounce in equity markets” inspired by hopes that the new U.S. administration of Donald Trump will boost the economy, but said rock-bottom bond yields globally suggest “a low return and risky environment” remains the order of the day.
“Given the fact that we have a mandate to avoid excessive risk, that's weighing on our minds quite considerably,” said Mr. Costello. He reiterated that the fund's investment team is calling on the government to review whether the inflation-adjusted target return of 4.5% for the past decade remains appropriate for the coming decade.
In the same briefing, David Neal, the fund's managing director, said the global investment landscape is marked by “fragility,” as low bond yields leave economic policymakers little room to respond effectively to unforeseen shocks.
Against that backdrop, the Future Fund maintains “below normal” risk exposures, said Mr. Neal. Allocations changed only incrementally over the past quarter, he noted. Alternative segments such as private equity, hedge funds and infrastructure edged up while allocations to developed and emerging markets equities and cash fell marginally.
Among the bigger shifts from the prior quarter, infrastructure climbed to 7.9% of the portfolio from 6.6% as of Sept. 30, reflecting the Future Fund's purchase of a 20% stake in an A$9.7 billion deal closed during the latest quarter for a 50-year lease for the Port of Melbourne.
The hedge fund allocation, meanwhile, climbed to 14.2% from 13.6%, while private equity rose to 10.9% from 10%.
The fund's allocations to public equity slipped to 29.1% from 29.4%. A marginal rise for Australian equities to 6.7% of the portfolio from 6.5% was offset by a fall for developed market equities to 15% from 15.3% and emerging markets equities to 7.4% from 7.6%.
Mr. Neal said the weakening of the Australian dollar vs. the U.S. dollar during the quarter was a factor in many of those allocation shifts.
Elsewhere, allocations to property dropped to 6.2% from 6.5% in the quarter, while debt — predominantly private debt — edged up to 12% from 11.8%.
The fund's allocation to cash, meanwhile, dropped to 19.7% from 22.1%, with a Future Fund news release attributing much of that decline to currency movements.
Fund executives said two aspects of the Future Fund's regulatory parameters — its 4.5% real target return and the government's ability to begin drawing down the fund's assets in 2020 — are topics of discussion now.
While declining to say whether the Future Fund team has proposed a specific lower target for returns, Mr. Costello noted that the fund has been able to balance its twin mandates of delivering that 4.5% return while not taking excessive risk over the past decade. However for the coming decade, those two directives “will be rubbing into each other,” he said.
With regards to when, and by how much, the government will begin drawing down the fund's assets, Mr. Costello said the Future Fund is hoping to have as much clarity as possible on that outlook. Without that, the fund will have to begin setting aside liquidity to cover uncertain payouts, which in turn will depress investment returns, he said.
The Future Fund executives declined a number of opportunities to opine on President Trump's policy decisions, beyond saying that open trade is essential for all investors.
