Future Fund makes negative return in FY22 amid tough economy

The Future Fund's assets fell below A$200 billion as it recorded a 1.2% loss for the recent financial year that ended June 30, but its chief executive and chair remain unperturbed as the fund's performance beat bond and equity markets.

“In a year where global equities and global bonds fell by more than 10% each and where the Australian stock market fell 6.5%, the return of -1.2% was a pleasing outcome and shows the portfolio successfully navigated substantial market falls,” said Peter Costello, chair of Future Fund's Board of Guardians in its portfolio update on August 31.

The Future Fund's FY22 results follow the previous year's record return of 22.2%, amid a bull market and strong private equity returns. The sovereign wealth fund’s assets grew to over A$204 billion ($138.84 billion) during FY21.

However, while monetary and fiscal policies aimed at stimulating the economy worked in investors' favour during that financial year, 2022 has experienced a change in economic conditions driven by significant global and domestic inflation.

During a particularly volatile final quarter in FY22, the fund’s assets fell by 3.1% to A$194.4 billion. Costello sees market conditions getting worse before they get better. 

“Central banks are responding by tightening policy and it is likely that further interest rates rises will be needed to achieve their inflation objectives. We expect deglobalisation, geopolitical tensions, trade barriers and high inflation to be a feature of the investment climate going forward,” he said.

REPOSITIONING THE PORTFOLIO

At a media briefing on Wednesday (August 31), Raphael Arndt, chief executive of the Future Fund, reiterated the SWF’s focus on preserving capital amid the macro-economic turbulence facing the investment landscape.

“We think the investment world is changing and we have published, very transparently at the end of last year, our thoughts on that in our new investment audit discussion paper. We've made more than $30 billion worth of changes to the portfolio to position the Future Fund for that world,” said Arndt.

This was the first financial year of a planned three-year programme to reposition the portfolio for the changing landscape, said Arndt.

During the year, the Future Fund cut its allocations to publicly traded equities in its portfolio from 35.8% to 28.5%, and redirected that money to infrastructure and macro hedge funds, which delivered returns of 20% or more for the year, he said.

By contrast, the SWF’s allocation to alternative assets such as private equity, real estate, infrastructure, timberland, private debt, and hedge funds increased to 59.4% of the portfolio from 50.9% a year earlier.

“Those changes meant that the return was A$4 billion better than it would have been” had the Future Fund left the portfolio unchanged, according to Arndt.

With a decade of high growth and plenty of liquidity coming to an end, Arndt stated that the private equity and venture capital sectors are about to undergo a shakeout, making access to the finest general partners in those market segments even more important moving forward.

“We're well positioned, better than most," said Arndt.

MOVING TARGET

Arndt explained that the government set up the Future Fund 16 years ago to strengthen its long-term financial position and offset its unfunded pension liabilities, as it had not set any assets aside for this purpose.

The government seeded the Fund with A$60.5 billion, which has since grown to around A$200 billion.

However, despite the SWF delivering strong returns of approximately 9.7% per annum over the last 10 years, the pension liabilities have increased too, said Arndt.

“The discount rate the government actuary uses to value them has fallen along with the government bond rates and will now be rising. But a recent government report published just a few months ago indicated that their expectation is still that the Future Fund will reach a scale by 2029/2030 to fully offset that liability, which has grown to above A$250 billion now,” he said.

Arndt said trying to protect the SWF's portfolio in an uncertain macro-economic environment is “not easy", but remains confident in his team's ability to do so.