After shifting its listed equities approach away from active managers six years ago, the Future Fund has revealed it is rethinking its strategy amid what chief executive officer Raphael Arndt has described as “some of the most profound changes in living memory”.
In a recent address to the Australian Financial Review’s Alpha Live Conference, Dr Arndt explained that the previous pivot away from active management had been influenced by markets at the time, which he said were being driven by the policies of central banks.
“Our view was that it was nigh on impossible for active equities managers to consistently add value over and above their fees,” Dr Arndt stated.
But since then, Dr Arndt said that changing economic and market conditions had prompted the sovereign wealth fund to again consider active equity management.
“Economies are diverging, and companies can better distinguish themselves in a more challenging environment,” he said.
“As a result, active alpha-seeking strategies in our $65 billion listed equities program are increasingly attractive, provided that we can be confident that returns are driven by skill and not luck.”
The Future Fund grew by 3.4 per cent to $202.8 billion in assets during the March quarter, and had $17.9 billion in Australian equities, $34.5 billion in developed market equities, and $12.0 billion in emerging market equities.
Dr Arndt said that the fund was now using technology to better understand the drivers of returns from investment managers and to help determine whether skill exists “or whether managers are just applying a mechanical strategy which can be recreated cheaply”.
“Markets are constantly changing, and we must evolve our strategy in response,” he said.
“For example, changes in domestic markets have made small cap equities attractive to us for the first time and we have commenced a new program to invest in them in recent months. We are doing everything we can to search out skill wherever it exists.”
According to Dr Arndt, while alpha and skill-based strategies have always been an integral part of the Future Fund’s approach, the role of alpha in portfolio construction is now more important than ever.
“In other words — just having capital is no longer enough to ensure decent returns. A previously considered safe investment like an office building or shopping centre is no longer safe. A large cap company can be split up, regulated or its markets disrupted,” he said.
“There are no set-and-forget investments anymore. Beta returns will not be enough to ensure a comfortable retirement, or in the case of the Future Fund, to meet challenging investment mandates.”
The Future Fund CEO added that he believes that paying “sometimes high fees” to fund managers would be necessary in order to gain access to skill.
This increased focus on skill was also outlined in the fund’s latest quarterly portfolio update, which noted that higher inflation and interest rates had made market returns less reliable.
The Future Fund previously predicted a return of inflation and rising interest rates, more conflict and deglobalisation in its position paper, A New Investment Order, published in 2021.
As these predictions have now begun to eventuate, Dr Arndt said that investors, including the Future Fund, need to change how they think.
“By relentlessly searching for alpha, by using technology to make sure we are buying skill and not luck, and by thinking long-term and responsibly, we are building more resilient portfolios which can generate better returns, irrespective of the market environment,” he said.
“This is the most important conversation any investor can have today. Every one of us should be talking about the new investment order.”
