Speaking on a recent podcast, hosted by Bridgewater Associates, Future Fund’s chief investment officer, Ben Samild, detailed the fund’s approach to the more inflationary environment, altered growth dynamics, and varying levels of risk associated with different countries.
Samild explained that not only did the sovereign wealth fund make circa $100 billion worth of changes to its portfolio between 2020 and today, it also dramatically shifted its duration exposure and took more risk.
“We put a higher price on our liquidity and flexibility, we made opportunistic things, marginal changes to our sector strategies to prioritise different features within the assets we were buying or selling,” Samild said.
“And we think all of that – we know all of that – led to better performance. We think more importantly, though, it has led to a more, to your point, resilient portfolio to multiple potential environments.”
Discussing the new world that emerged after a 40-year era defined by a “unipolar, dominant hegemon, laissez-faire” environment with “ever-increasing integration”, Samild said the fund needed to navigate change while “everyone’s screaming that the world’s ending”.
“We felt very strongly that that world had reached – that that rubber band had been pulled as far as it was going to be pulled, and it was going to start coming back in the other direction,” he said.
“The changing geopolitical environment, which was going to lead to a changing domestic policy, environment change priorities, and these are all the deglobalisation, reshoring/friendshoring, strategic competition, demographics, competing industrial policies, more dirigiste governance – you know, all of these things that have played out a bit and now you can’t open your first page of Bloomberg screen without being drowned in this stuff.
“These were things that we identified as important, I guess, change agents back in 2020 of what we saw as the secular horizon then, and we still do.”
Elaborating on how the Future Fund protects its portfolios from inflation, Samild said “there’s no one magic contract you can buy” that yields protection.
“It’s clear you have to think about it through the total portfolio and try to measure it through the total portfolio – measure your vulnerability through the total portfolio, which we do. We try to understand almost like an inflation duration concept and how that’s changed over time,” he said.
“But the question’s really hard, right? Because it’s whose inflation? Where inflation? What inflation? What kind of inflation? How does that bubble up?”
Samild suggested that while some may see commodities as a hedge against inflation based on the 1970s experience, this strategy might not work if inflation is driven by massive fiscal expansion rather than supply constraints.
“We’ve tried to be thoughtful about the kind of inflation we’re concerned about, what we can do, how much of a cost we’re willing to bear, what event-style issues that end up leading to inflation,” he said.
“We aren’t going to predict and we’re not going to manage the portfolio too specifically, but we would just want to make sure we can survive them and ideally thrive on the other side of them.”
Samild added that while investors have become complacent in viewing inflation as a uniform global phenomenon, he now sees a need to be more cautious, as Australian inflation could diverge significantly from US inflation, making the investment landscape even more challenging.
“The Australian inflation-linked bond market is de minimis, so I can’t just go out and buy those things. I can go out and buy US inflation, but that might not actually be matching my mandate,” he said.
Previously, former Future Fund deputy chair Alicia Gregory flagged that the sovereign wealth fund is exploring alternative avenues beyond a traditional bond-equity portfolio, having realised that structurally higher inflation could undermine the defensiveness of bonds.
“Investors may need to search for alternative forms of defensiveness through that type of environment, perhaps through shorter duration of private credit, differentiated hedging, or seeking assets with a higher, pass-through domestic inflation,” Gregory said at the Australian Wealth Management Summit in Sydney.
The fund first warned of a changing environment in its June position paper, in which it said investors need to familiarise themselves with the complexities and potential implications of geopolitics, emphasising its pivotal role in shaping a new investment landscape that will profoundly impact financial markets, macroeconomics, and policy decisions.
