Australia’s Future Fund reports 3.4% drop for quarter

Australia’s Future Fund Monday said its portfolio ended the March 31 quarter down 3.4% at A$162.3 billion ($99.8 billion), leaving the fund with a decline of 0.2% for the first nine months of its fiscal year.

The fund’s “dynamic approach has been extremely valuable in helping us prepare for and navigate a historic dislocation brought about by COVID-19,” Peter Costello, chair of the Future Fund board, said in a news release Monday. “The board is focused on positioning for what remains a challenging and volatile environment.”

Raphael Arndt, the Melbourne-based sovereign wealth fund’s chief investment officer said at a news conference Monday that the fund’s modest declines for a quarter that saw the coronavirus pandemic pummel global equity markets pointed to the success of his team’s efforts to enhance the portfolio’s liquidity and flexibility over the past year, in anticipation of a pickup in volatility.

But in contrast to a number of superannuation funds in Australia, Mr. Arndt said the Future Fund will stick to its normal schedule for valuing the third of its portfolio invested in illiquid assets — such as infrastructure, private equity and unlisted real estate— after the June 30 close of the fiscal year.

Unlike those super funds whose participants can switch to different options or different funds at any time, the Future Fund doesn’t face withdrawals and consequently isn’t facing pressure to lower valuations sooner to ensure equity between participants leaving and those staying put, he said.

Had Future Fund cut valuations for its illiquid holdings by the 7.5% quantum a number of super funds announced in late March, its portfolio would have reported a 3.5% decline for the first nine months of the fiscal year and a 6.6% drop for the quarter, Mr. Arndt said.

The investment team’s heightened focus in recent years on the balance of risks and rewards on offer in public and private markets led it to trim holdings of illiquid assets, such as Gatwick Airport, while bolstering defensive allocations including foreign currency exposures, which “all worked as expected,” Mr. Arndt said.

For the quarter, the Future Fund’s holdings of listed equities dropped to 33.7% of its portfolio from 36% as of Dec. 31. Of that total, emerging markets shares dropped to 8.6% from 10.2% and Australian equities slipped to 6.1% from 6.8%. Developed market equities held steady from the prior quarter at 19% of the portfolio.

The fund’s cash holdings, meanwhile, dropped to a multiyear low of 9.6% from 13.7% at the close of the prior quarter, pointing to some rebalancing during the latest period from cash to developed market equities.

Mr. Arndt cited defensive hedge funds as one opportunistic market segment that had received allocations over the past quarter. Hedge funds accounted for 14.7% of the portfolio as of March 31, up from 13.4% as of Dec. 31.

With equities’ share of the portfolio shrinking, illiquid asset classes saw their weights increase. Private debt securities rose to 9.7% to 8.6%, infrastructure and timberland climbed to 7.6% from 7.0% and real estate edged up to 6.6% from 6.3%. Private equity jumped to 18.2% from 14.9%.