The Future Fund has downplayed the possibility of a so-called Goldilocks scenario in which economic growth is neither too hot nor too cold and inflation gradually moderates.
The sovereign wealth fund returned 6.0 per cent in the 12 months to 30 June, reflecting its wider diversification across international markets and private assets over the period.
In a quarterly portfolio update, Future Fund chair Peter Costello said the Australian and global economies had slowed with new challenges emerging for long-term drivers of growth.
“We are yet to see the full impact of higher rates work their way through developed economies and continue to see the risk of a recessions in developed economies as central banks remain vigilant in bringing inflation down,” he warned.
“Share markets were surprisingly strong through the second half of the financial year as they appeared to be pricing in a ‘Goldilocks’ scenario. Whilst this would be a welcome outcome, we see risks on the downside.”
Mr Costello noted that, despite signs that inflation has passed its peak, it remains at elevated levels and sits well above the 2–3 per cent target range of the Reserve Bank of Australia (RBA).
“Data shows wage and price pressures that contribute to inflation remain strong, leaving open the possibility that inflation will continue and the path to lower interest rates remains a way off,” he added.
The Future Fund grew to $206.1 billion at the end of June, up from $202.8 billion at the end of March and more than $145 billion above its initial contribution of $60.5 billion in 2006.
Since its inception, the fund has delivered an average annual return of 7.7 per cent per annum, above its target return of 7.0 per cent, while over the past decade it has delivered an average annual return of 8.8 per cent per annum against a target of 6.9 per cent per annum.
Future Fund chief executive officer Raphael Arndt said that favourable investment conditions which have driven markets in recent decades were undergoing “profound changes”, with markets underpricing the “significant economic and geopolitical risk” anticipated by the sovereign wealth fund.
“The Future Fund portfolio is positioned moderately below neutral risk settings at a time when the economic outlook and the direction of inflation and interest rates make investment returns less certain,” he explained.
“We have made significant changes to the portfolio over the past two years and this means that our holdings and returns will look increasingly different from those of other asset owners.”
Dr Arndt also pointed out that higher interest rates made it easier to generate meaningful returns from a diversified range of assets like those owned by the Future Fund.
Mr Costello reiterated that the Future Fund’s board remained focused on maintaining a portfolio that is resilient to a range of scenarios while delivering attractive risk-adjusted returns.
“With persistent higher inflation, we expect real returns to investors will remain below those of the past decade,” he added.
Earlier this month, the Future Fund announced the promotion of current deputy chief investment officer (CIO) Ben Samild to CIO. Dr Arndt had served as acting CIO since June last year.
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.