WEEKLY E-MAIL

5 December 2022

THE FUTURE FUND SEPTEMBER QUARTER UPDATE

By Amelia Paullo

The Future Fund, Australia’s independently managed sovereign wealth fund, was established in 2006 by then Treasurer Peter Costello to invest for future generations of Australians. It serves the purpose of strengthening the government’s long-term financial position and was initially seeded with approximately $50 billion through the sale of Telstra as well as several budget surpluses, back in the good old days when budget surpluses existed.

At the end of the September quarter, the Future Fund had a value of $193 billion and achieved an impressive 10-year return of 9.2% per annum against its 10-year target return of 6.6%. The fund’s long-term mandate is to provide a return of at least CPI plus 4 to 5% per annum, with an acceptable but not excessive level of risk.

The fund’s one-year return of -3.0% however was less impressive compared to its one-year target of 11.3%. The target return was higher in the current environment of high inflation. That being said, compared to the ASX200 which fell almost 8.0% during the same period, the Future Fund’s return has been relatively good, providing relative capital stability in volatile times.

The Hon Peter Costello AC, Chair of the Future Fund Board of Guardians, said, “As was anticipated by the Fund, the exceptional monetary and fiscal stimulus of the last few years is being withdrawn, reducing asset prices and introducing much more volatility. The board continues to take a prudent approach to positioning the portfolio and it is focused on sustaining a portfolio that is as robust as possible to a range of scenarios, and that balances our risk and return objectives. We expect that real returns will continue to be much lower than in recent decades.”

One year ago the Future Fund released a position paper called New Investment Order, where it explained its perspective on how the world was changing, noting paradigm shifts such as deglobalisation, populism, technological disruption and climate change which it sees as set to continue for the foreseeable future. According to the fund’s Chief Executive Officer, Dr Raphael Arndt, those trends have accelerated over the last 12 months and the fund has been actively repositioning the portfolio to respond to this changing environment. Specifically, the fund is focused on enhancing portfolio resilience while increasing its allocation to strategies designed to protect the portfolio against inflationary scenarios.

The New Investment Order mentions modestly increasing the Fund’s structural risk profile to help achieve its target returns. It also notes an increased level of investment in private market opportunities and increased tolerance for illiquidity to access value-add from less liquid and more actively managed investments. In this challenging environment, the Future Fund identifies actively managed returns as even more attractive and worth the higher fees required to access them.

The below New Investment Order Framework shows how geopolitical changes are effecting macroeconomics, government policy and financial markets.

Source: Future Fund, Position Paper – New Investment Order. September 2021

The Future Fund’s new investment order paints a more challenging economic environment than the one we have been accustomed to in previous decades with previously mentioned paradigm shifts accelerating over the last 12 months.

As we approach the new year it is a good time to reflect on the changing nature of the global economy and how we too can position our portfolios to be as robust as possible in an uncertain future.

GFM’s investment philosophy of structuring highly diversified portfolios across a range of asset classes, that can produce sustained income through different market cycles has helped our clients navigate this highly volatile market environment.

Amelia Paullo
Financial Planner
Authorised Representative No. 1243426

If you have any questions or comments, please email me at amelia@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution.  The information here is of a generic nature, and does not take into account your investment objectives or financial needs.  No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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