Australia's Future Fund posts loss in 2022

The core Future Fund portfolio was worth AUD 196.1bn (USD 135.8bn) as of December 2022, having surpassed AUD 200bn for the first time 12 months earlier, according to a statement. Total assets under management, which include various smaller pools of capital under federal government mandates, totalled AUD 243bn.

The core fund’s private equity exposure amounted to 16.9%, or AUD 33.2bn, compared to 16.8% a year earlier. The relative allocation to property held steady at 6.5%, while infrastructure and timberland rose from 8% to 9.3% and other alternatives increased from 14% to 17%.

“Over the past year we have, however, made significant changes towards investments that rely more on investor skill than on market risk, in line with our thinking that such an approach will be better rewarded as rising rates and slowing growth will drag on market returns,” said CEO Raphael Arndt, noting that the portfolio remains positioned towards the mid-range in terms of risk settings.

He also highlighted a recent Future Fund white paper that questions whether traditional portfolio construction is dead. The premise is that investment tailwinds of the past 30 years – globalisation, rapid growth in China, interest rate declines, abundant food and energy, a peace dividend, global labour and capital mobility, falling costs of capital, and lower tax rates – have turned into headwinds.

As the investing landscape changes, accepted investment models based on correlation and diversification are less sturdy. Future Fund advocates increasing PE investment in pursuit of alpha, focusing on liquidity and dynamic asset allocation, maintaining a broader currency basket, increasing domestic exposure through infrastructure, and adding more tangible assets as inflation protection.

Future Fund’s target return is 4-5% above the consumer price index (CPI). With the CPI reaching 7.8%, compared to 3.5% in 2021, the fund was well short of its 11.8% target. However, the fund has delivered a 7.6% annual return since its inception in 2006 against a target of 6.9%.

Costello noted that the fund’s defensive posture limited declines during a 12-month period in which the S&P ASX 200 index fell 5.5% and the S&P 500 dropped 13.6%. He added that the fallout from the end of a long period of monetary and fiscal stimulus, which has seen central banks hiking interest rates to control inflation, may continue.

“The cycle of rising rates to control inflation is not yet complete and brings with it the possibility of recessions in much of the developed world. The extent of further tightening and the ways in which markets and economies respond to them will be the key issues for investors,” Costello said.

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• Topics
• Australasia
• LPs
• Performance
• Australia
• Future Fund