Speaking at a results briefing yesterday, Future Fund chief investment officer David Neal pointed to the extra return that stemmed from what he called the 'contracting risk premia' – that is, the willingness on investors' part to view the world as less risky.
“Those effects are not something that can continue forever. You can’t have risk continuing to be priced lower and lower,” said Mr Neal.
The market cannot reach a point where no risk is being assumed by its participants, he said.
“Investors have to look at that info and say ‘Do I think that risk premia have contracted enough to reflect a changed environment? Has it gone too far? Or has it still got somewhere else to go?’” said Mr Neal.
The US Federal Reserve's asset purchasing program has effectively encouraged markets to “pay more for the same cash flow stream”, he said.
“As a result, valuations across most sectors and geographies – beyond just equities, if you look now at val for RE for infra, for credit - they look full. That’s not to say they are widespread expensive – I don’t think we think that, and we’re not scaremongering – but it’s certainly getting harder to find pockets of really interesting valuation. That’s something investors need to be careful about,” said Mr Lean.
Future Fund chief executive Mark Burgess was quick to point out the fund was not calling a for a correction or claiming markets were overvalued per se.
“We’re simply saying that these high rates of return are going to be more difficult to extract because many of the factors behind it are already priced into the asset prices,” he said.
Mr Burgess would not comment on the identity of his successor, revealing only that the board is currently in talks about the matter.
Mr Neal also declined to comment about speculation that he was set to move into the chief executive position, claiming he was happy in his current role.
The Future Fund returned 17.2 per cent in the calendar year to 31 December 2013, 10.3 per cent in the three years to 31 December 2013 and 10.6 per cent over the five years to 31 December 2013.
The fund had $96.56 billion in funds under management as at 31 December 2013.
