Australia’s sovereign wealth fund has dodged the worst of the market volatility, crediting its performance to low illiquid exposures.
While the ASX 200 fell 23.1 per cent and the S&P 500 fell 19.7 per cent, the Future Fund recorded a negative return of 3.4 per cent – meaning the fund return was 0.2 per cent for the financial year to date.
Future Fund chairman Peter Costello has credited that performance to selling or reducing more than 30 individual illiquid positions due to high pricing and to “increase portfolio flexibility”.
“For some time we have warned about the risks to markets and the need to position the portfolio for a range of uncertainties,” said Mr Costello. “Our dynamic approach has been extremely valuable in helping us prepare for and navigate a historic dislocation brought about by COVID-19. The board is focused on positioning for what remains a challenging and volatile environment.”
While the Future Fund’s defensive strategies have performed “as expected”, chief investment officer Dr Raphael Arndt says they won’t be charging into opportunities presented by the unprecedented market movements.
“It is too early to know whether the unprecedented fiscal and monetary policy stimulus by governments around the world will be sufficient to offset the significant impact to global growth due to the COVID-19 pandemic,” Dr Arndt said. “As a result, while we have participated in several opportunities created by the market disruption over recent weeks, we remain cautious in terms of overall portfolio positioning.”
“In these challenging times, portfolio diversification, flexibility and prudent management of risk remain as important as ever.”
The Future Fund has an exposure of around 32 per cent to illiquid assets, including infrastructure and private equity.
“The Future Fund has always marked its illiquid assets to market as at 30 June after rigorous testing and under a methodology supervised by independent audit,” Mr Costello said. “This will be done as usual after 30 June 2020. However to give some idea of the scale, if private market valuations had been marked down by 7.5 per cent, the fund’s financial year to date return would have been -3.5 per cent.”
“The Future Fund is designed to strengthen the long-term financial position of the Commonwealth and the board remains focused on generating strong long-term risk-adjusted returns.”