Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. MONEY MANAGEMENT
May 15, 2017 01:00 AM

Future Fund begins revamp of public equities portfolio

Australian giant aims to get more bang for the buck

Douglas Appell
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Mark Graham/Bloomberg
    Chairman of the Australian Government Future Fund, Peter Costello

    Asset owners in Asia are working to better tie the fees they pay equity managers to pure skill, rather than market movements, in anticipation of tougher times ahead.

    That quest has remained on their agendas even as markets have continued to defy gravity in recent quarters.

    Japan's ¥144.8 trillion ($1.3 trillion) Government Pension Investment Fund is renegotiating the fees it pays its equity managers fees now with the goal of only paying “for alpha,” said Hiromichi Mizuno, the fund's chief investment officer, at a Milken Institute Global Conference in California on May 3, two months after the GPIF reported a record gain of 8%, or $90 billion, for the final quarter of 2016.

    Likewise, two weeks after Australia's A$129.6 billion ($98.1 billion) Future Fund reported a healthy 10.5% return for the 12 months through March 31, Chief Investment Officer Raphael Arndt, in a March 5 speech at an investment forum, outlined a “new approach” — in part aimed at ensuring managers are only paid for “true stock-picking skill” rather than beta or factor-style bets – which the Melbourne-based fund is putting in place for its A$38 billion listed equity program.

    Management consulting firm Oliver Wyman and Morgan Stanley & Co., in a mid-March report, predicted a low-return environment in coming years will leave asset management firms facing “intense fee pressure,” resulting in a 3% decline in industry revenue between 2017 and 2019.

    A significant compression of forward-looking returns makes “fee drag … a much more significant issue” today, Mr. Arndt said in his speech. In combination with technology that allows asset owners to better understand their underlying exposures — and determine, for example, whether a manager is earning active fees for delivering returns that can be inexpensively obtained via a value or quality factor index — that prospective drag requires “a new approach to active equities investing,” he added.

    In a May 11 interview, Mr. Arndt described that new approach as more “incremental improvements” than “big bang.” It looks to take advantage of that technology to analyse investment exposures to better set the parameters for the portfolio the fund is looking to build, whether in terms of factor exposures or the risk budget to be deployed.

    One issue the Future Fund's multiyear equity revamp will look to address is the degree to which the active investment decisions of managers end up offsetting one another, leaving the fund paying active management fees for “what we've found,” at the total portfolio level, is “not significantly different” from market beta, he said.

    “Improvements in our technology and systems will enable us to identify offsetting positions…(paving the way for) a richer conversation with our managers to better understand where there are positions, styles or factors that are offsetting each other,” said Mr. Arndt. While there can be good reasons for offsetting positions, such as different time horizons, this “enhancement in technology will provide us with greater insight into the portfolio, and consequently more control over the portfolio,” he said.

    Another of the fund's answers to offsetting positions could bring cheer to a segment of the money management industry that's been a lightning rod for fee-related criticism in recent years.

    In his speech, Mr. Arndt said “pure stock-picking skill has the best opportunity to thrive when given the broadest canvas possible,” and such skill “is most likely to be found in relatively small-capacity managers looking at global stocks with long-short market neutral mandates.” In the subsequent interview, the CIO said those “smallish long/short managers,” with maybe 30 stocks apiece in their portfolios, would be less likely to cancel each other out.

    While the Future Fund's listed equity program has been predominantly long only, a “modestly sized” long/short position was added in 2010, he noted. Since that year, the fund's annual report has included Blackstone Alternative Asset Management, the hedge-fund-of-funds business of New York-based Blackstone Group LP, as one of its global equities managers.

    In the May 11 interview, Mr. Arndt said the equity program's long/short position is “in the billions.” At less than 10% of the listed equity program, it's “not material from a capital allocation point of view” but it is material from a risk perspective, he said.

    The equity program's long/short portion is separate and distinct from the fund's reported hedge fund allocations of A$19.6 billion, or 15.1% of the portfolio, as of March 31, up from 14.2% at the close of the prior quarter.

    The Future Fund is determined to get “more bang for its listed equities buck,” but that doesn't mean it's hell bent on lowering overall fees, said Mr. Arndt. Skill is rare and “we would be quite willing to pay performance fees for managers delivering that skill,” he said.

    “People might say the pay load will be bigger than long only,” but in terms of the fee paid per unit of skill, instead of for factor exposures or beta, the fee drag is less, not more, he said.

    While Mr. Arndt pointed to the passive global beta substrategy of the fund's new approach - led by AP4 veteran Bjorn Kvarnskog, who joined Future Fund as head of equities in October 2015 - as the most significant of the listed equities program's five substrategies, he went on to note that active equity exposure has ranged historically from 40% to 60% of the A$38 billion total.

    The other substrategies are global alternative betas, Australian equities, emerging markets equities and global alpha.

    For the long-only active portion of the listed equity program, Mr. Arndt said, as with the hedge fund program, the Future Fund is willing to back “new and emerging managers,” with histories as young as one or two years, noting such firms often have greater incentives to perform than bigger, long-established firms.

    “We envisage that quality active managers in our program can co-exist with the introduction of a number of small and emerging managers,” he said.

    At the macro-level, the Future Fund's listed equities program is its most important lever for raising or lowering the total portfolio's risk exposure, in response to the investment team's views on global risks and rewards. As of March 31, listed equities accounted for 29% of the portfolio, down from 42.5% in early 2014.

    Related Articles
    Australia's Future Fund posts 10.5% return in year ended March 31
    Surge of Asian assets into fund of funds not expected to be saving grace for in…
    Australia trims Future Fund's investment target by 50 basis points
    http://www.pionline.com/article/20170619/ONLINE/170619884
    Australia's Future Fund returns 8.7% for year ended June 30
    Future Fund reports 0.8% quarterly gain, incremental move to equities from cash
    Future Fund veteran joins Fidante Partners as head of boutique strategy
    Australia's Future Fund up 3.3% for quarter, shifts to equities from cash
    Australia's Future Fund announces organizational changes, will add new positions
    Australia's Future Fund returns 1.4% for quarter, 8.6% for year
    Recommended for You
    Ashmore taps Ng for new head of Asia ex-Japan
    Barry Silbert
    Institutions seek out non-correlated assets after 2022 losses in stocks and bonds
    Ariel poaches 5 emerging markets value equity managers from AllianceBernstein
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    Are Factors a Thing of the Past?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing