
Australia's Future Fund posts negative return, sells part of PE portfolio
Future Fund has posted its first yearly negative return since the global financial crisis, amid economic chaos caused by COVID-19, and rebalanced its private equity portfolio as part of efforts to avoid “excessive risk.”
The sovereign wealth fund said it pared exposure to international growth and buyout managers following a period of very strong performance. Acting CIO Sue Brake told a media briefing that A$6 billion in private equity assets had been sold off. Future Fund exposure to asset class stood at 15.2% - or A$24.4 billion ($17.8 billion) – as of June 2020, down from 16% a year earlier.
It was well known that a transaction was in the works, with then CEO David Neal flagging the ongoing secondary process last December. Deputy CIO Wendy Norris had earlier stressed that investors “should be thoughtful about balancing risk and reward” as they deploy more capital into private markets that present liquidity and valuation challenges. “You [might] end up with a less flexible portfolio and you might not be able to meet the demands of your beneficiaries,” she said.
Private markets accounted for 45% of Future Fund’s overall portfolio in June 2019. The sovereign wealth fund has previously cited carefully cultivated private markets exposure – in private equity, that meant an emphasis on VC and growth managers, as well as co-investment – as one of the reasons it has comfortably outperformed superannuation products.
While prioritizing portfolio flexibility pre-dates COVID-19, the pandemic has forced Future Fund to intensify these efforts.
“The factors that have fueled strong performance in the past may not be there any longer. We need to be ever more strategic in how we pursue long-term returns in the future,” said Peter Costello, chairman of the board of guardians, in a statement. “We will continue to prioritize portfolio flexibility, ensuring the portfolio is robust to a range of possible scenarios and has ample liquidity. This will open up opportunities from the current market to position ourselves for long-term returns.”
Lockdowns driven by the need to contain the pandemic are largely responsible for the Australian economy experiencing its first recession in 30 years. Meanwhile, listed equities have been volatile, with the public markets falling by more than one-third in March.
Against this backdrop, Future Fund’s return for the 12 months ended June was -0.9%, compared to a gain of 11.5% last year. The 10-year annualized return is 9.2% against a benchmark target of 6.1%. Total assets were A$161.1 billion, down from A$162.6 billion in 2019. Including separate vehicles focused on supporting medical research, indigenous populations, and emergency relief efforts, Future Fund is responsible for A$205.1 billion.
As of June, the main fund had a 17% cash allocation, up from 11.9% a year earlier, as percentage exposure to public equities, property, infrastructure and timberland, debt securities, and hedge funds was reduced. The need for portfolio flexibility saw turnover in the infrastructure portfolio as well as private equity, with assets such as Gatwick Airport sold off and some of the capital redeployed in newer themes like fiber and data centers.
Neal’s move to IFM Investors in February saw Raphael Arndt promoted from CIO to CEO. Future Fund’s private equity team is also in the middle of a rebuild, with Alicia Gregory recruited from MLC last year to head up the asset class.
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