Australia’s Future Fund reported an 8.7% gain for the year ended June 30, with the A$133.5 billion ($102.3 billion) portfolio maintaining relatively low risk exposures and elevated levels of liquidity to cope with an uncertain investment environment.
While the gain for the quarter ended June 30 remained healthy, at 2.9%, the latest 12-month return was lower than the 10.5% mark for the year through March 31, in line with recent warnings from Future Fund executives that markets should prove less generous in coming years than they’ve been for the period coming out of the financial crisis.
The fund’s investment team has worked to add more “flexibility,” to allow the portfolio “to respond to whatever the world throws at us,” whether at the asset level or the macro level, CEO David Neal said at a briefing Thursday on the latest results.
As of June 30, the fund’s allocation to cash edged up to 21% of the portfolio, from 20.4% at the close of the prior quarter. Private equity climbed to 11.6% from 10.6%.
The fund’s allocations to publicly listed equities, meanwhile, dropped to 27.8% from 29.1%, with the weight of developed market, emerging market and Australian equities all slipping over the past three months.
Mr. Neal said even though a considerable amount of activity is taking place “under the hood” in search of “the best assets we can find,” for the most part changes at the broad allocation level over the past three months reflect market movements more than significant shifts in investment strategy.
Hedge funds ended the latest quarter accounting for 14.8% of the portfolio, down from 15.1% at the end of March, while debt securities — predominantly private debt — dropped to 10.6% from 11.3%.
The weight of infrastructure and timberland in the portfolio edged up to 8% from 7.6%, while property increased to 6.2% from 6%.
Foremost among the challenges facing financial markets now is the inevitable normalization of interest rates after years of extraordinary quantitative easing policies, noted Peter Costello, the fund’s chairman, at Thursday’s briefing.
That return of rates to more normal levels “will have to happen, and when it does that will affect asset prices quite significantly,” he said. That prospect is affecting the way the Future Fund team is constructing its portfolio, he added.
Elsewhere, a separate fund overseen by the investment team, the Medical Research Future Fund, reported assets of A$4.6 billion as of June 30, and has since grown to more than A$6.5 billion with an additional injection of A$2.2 billion from the government, Mr. Neal noted.
That fund sports a lower risk profile, reflected by its target return of the Reserve Bank of Australia’s cash rate plus 1.5% to 2% a year. Even after a 50-basis-point reduction in the Future Fund’s target return earlier this year, its target return remains far higher, at CPI plus 4% to 5%.
