How Future Fund, NZSuper are bracing their portfolios for inflation

Despite being long-term investors, sovereign wealth funds have had to develop strategies for unexpected turns in market forces, which include direct inflation protection and multi-asset trend following strategies.
How Future Fund, NZSuper are bracing their portfolios for inflation

As US inflation continues to sit at record highs of about 8%, and developed markets in Asia Pacific such as Australia and Singapore push above 5%, investors have had to readjust their portfolios as they seek inflation hedges.

“In the short term, it absolutely impacts our view of the cyclical environment, and how that flows through the valuations of all assets, [including] our equity position, our rates, positions, and our different positions in things like currencies and commodities,” Ben Samild, deputy chief investment officer of Australia’s sovereign wealth fund Future Fund said during a panel discussion at AsianInvestor’s Asian Investment Summit last week.

In fact, Future Fund started buying direct inflation protection even when inflation was priced to be low for the long term.

“We thought that was probably unlikely,” he said. “And so we started accumulating that sort of protection as aggressively as we could. We oriented our absolute return portfolio towards this, which we often use as a bit of a skeleton key to shift the portfolio focus towards things we feel are vulnerabilities in the fund.”

The fund sought to increase portfolio resilience with solutions that did not “force us to take a yes or no bet on us being right about the outcome,” Samild said.

“It was really about resilience and risk management, in what is a nasty world for a typical asset owner portfolio. And so we've been incrementally doing that now for the better part of two years.”

Other sovereign wealth funds have similarly developed strategies to manage uncertain environments in recent years. Singapore’s GIC, for instance, explored new scenario- and simulation-based approaches that incorporated uncertainty into portfolio construction.

In the face of inflation, New Zealand Super is exploring multi-asset trend following strategies that hedge against market corrections, said Charles Hyde, head of asset allocation during the same panel discussion.

“When markets are performing poorly, they tend to hold up fairly well. And they also provide, at least historically, pretty good performance during high inflation periods,” he said.

“They're not a perfect hedge. But one of the nice things about that family of strategies is that they offer a fairly decent return through time, which some of the traditional tail protection strategies don't do that they require a bit more market timing to be effective.”

Hyde added that NZSuper also has exposure to momentum in the equity space. “We have a multifactor global equities strategy implemented by several external managers. And in that strategy, we target value, momentum, equality, and low risk styles.”

Look out for part 2 of this story that looks at how asset owners are looking towards alternatives as an inflation hedge

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