Persistent inflation and the risk of a wider regional conflict in the Middle East are among the “key issues” weighing on the outlook of the Future Fund at present.
The sovereign wealth fund suffered a 0.5 per cent decline in the September quarter, according to a portfolio update released on Friday, taking its funds under management to $205.2 billion as at 30 September, down from $206.1 billion three months earlier.
Alongside the latest portfolio update, chair Peter Costello indicated that the Future Fund board is continuing to take a “prudent approach” to positioning its portfolio.
“Looking ahead, the key issues remain the extent of further monetary policy tightening required to bring inflation back within central bank targets, how markets respond to those measures, and whether the Israel–Gaza conflict turns into a wider regional war,” he said.
“We are focused on maintaining a portfolio that is resilient to a range of scenarios and that balances our risk and return objectives. We expect that real returns will continue to be lower than in recent decades.”
Despite the negative movement during the most recent quarter, the Future Fund delivered an annual return of 6.3 per cent, up from 6.0 per cent in the year to June. Over 10 years, it has returned 8.4 per cent per annum (p.a.), above its target of 6.9 per cent p.a.
Mr Costello noted that markets are currently going through a “challenging period” marked by falling share prices and bond investors pricing in higher long-term interest rates.
He suggested that, to date, developed economies have proven resilient to the fastest increase in rates seen in a generation, with labour markets remaining strong and spending holding up as households continue to draw down their pandemic savings.
“Sticky inflation shows that interest rates may well continue to rise. Commodity prices are elevated, and US long-term interest rates have risen sharply as markets begin to price inflation being higher for longer than previously expected,” Mr Costello added.
In terms of its asset allocation, the Future Fund reduced its cash holdings from $23.10 billion in the June quarter to $19.01 billion in the September quarter. The proportion of the fund held in cash fell from 11.2 per cent to 9.3 per cent.
Meanwhile, the sovereign wealth fund lifted its allocations to Australian equities, private equity, property, credit and alternatives, while its allocation to global equities, including both developed and emerging markets, remained flat in percentage terms.
“We continue to position the portfolio to respond to the changing environment,” commented Future Fund chief executive officer Raphael Arndt.
“Our focus is on enhancing resilience and increasing our allocation to investment strategies that can protect the portfolio against inflationary scenarios. While the risk of a global recession has receded, the persistence of higher inflation and interest rates continues to test investment strategies.”
Dr Arndt also highlighted the promotion of Ben Samild to chief investment officer in August and said that Mr Samild, alongside the Future Fund’s investment team, “continues to develop the portfolio’s overall risk profile in line with the changing external environment”.
In its latest annual report, the Future Fund indicated that it made over $60 billion worth of changes across its portfolio during the 2022–23 financial year to position for higher inflation and lower returns.
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.