Those changes included cutting its allocation to publicly traded equities by roughly seven percentage points, to 28.5% of the portfolio from 35.8% a year before, and redirecting that money to infrastructure and macro hedge funds, which delivered returns of 20% or more for the year, he said.
The fund's allocations to alternatives — private equity, real estate, infrastructure, timberland, private debt and hedge funds — by contrast, jumped to 59.4% of the portfolio, from 50.9% a year before.
Those changes left the fund A$4 billion better off than it would have been otherwise, he said.
Even so, Mr. Arndt indicated that private market investments are not immune to price volatility, even if their price fluctuations are relatively muted vis-a-vis publicly traded equities. He noted, for example, that the 1.2% decline in assets for the latest fiscal year included private markets write-downs as of June 30. If instead the fund had used valuations for private assets as of March 31, the fund's returns for the year would have been a positive 2.4%, he said.
With a return target set at between 4% and 5% above Australia's consumer price index, the latest fiscal year investment return of -1.2% trailed a return target of 10.1% for the period, boosted by recent inflationary pressures. For annualized returns over five years and above, the fund remained comfortably above its return target.
Future Fund executives said the portfolio's level of risk remains at just below a neutral setting.
Over the three months through June 30, meanwhile, the portfolio's cash holdings dropped to 12.1% from 15.1%, reflecting the fact that holding cash at a time of high inflation is a losing proposition, Mr. Arndt said.
Meanwhile, despite some hefty declines for stock and bond prices, Mr. Arndt said it's not yet time to boost allocations to those asset classes.
While there has been a "reasonable decline" in equity markets, it can be argued that the retreat so far has much further to go, he said. U.S. stocks in particular, trading at trailing price-equity ratios of around 20%, remain quite elevated, he said.
And while the falls so far have been fueled by interest rate hikes, with more on that front to come, equity markets haven't begun to price in the second order effects of higher rates on economic growth and earnings prospects, Mr. Arndt said, adding that stock prices have much further to fall.
Mr. Arndt said his team will continue to expand allocations to private markets and alternatives in coming years.
And with global investments getting harder amid a continued retreat from globalization and rising geopolitical tensions, private assets in Australia's home market should become more alluring.
As an Australian fund with a CPI mandate, domestic investments like some of the Future Fund's recent allocations to local cellphone tower exposures, while always attractive, are "more attractive now than they have been," he said.
Mr. Arndt said a coming shakeout for the private equity and venture capital sectors, with a decade of strong growth and ample liquidity coming to an end, will make having access to the best general partners in those market segments all the more crucial going forward. In that regard, he said, "we're well positioned, better than most."
