The Future Fund has reported a negative 3.7 per cent return for the 2022 calendar year, dragging down the total assets of Australia’s sovereign wealth fund to $196.1 billion.
In a statement on Wednesday, Future Fund chair Peter Costello noted that developed economies had been hit by serious inflation of a scale not seen in the last 30 years.
“This brought to an end a long period of monetary and fiscal stimulus,” he said.
“Central banks’ response of rapidly increasing official interest rates to control inflation had a significant impact, driving down asset prices and investment markets.”
Mr Costello said that the fund’s defensive posture limited falls over the calendar year, comparing positively to the S&P/ASX 200 (-5.5 per cent) and the S&P 500 (-13.6 per cent).
“Importantly, in the second half of the calendar year/first half of the financial year, the fund showed positive growth,” he stated.
The Future Fund returned 1.6 per cent over the fourth quarter of 2022 and 0.9 per cent for the 2022–23 financial year to date.
Its average annual return of 9.1 per cent over the past 10 years remains above the target of 6.7 per cent. However, Mr Costello warned that serious risks continue to cloud the outlook.
“The cycle of rising rates to control inflation is not yet complete and brings with it the possibility of recessions in much of the developed world,” the Future Fund chair said.
“The extent of further tightening and the ways in which markets and economies respond to them will be the key issues for investors.”
The Future Fund board, Mr Costello said, continues to focus on positioning its portfolio to be resilient to a range of possible developments while delivering attractive risk-adjusted returns.
“We expect that real returns to investors, with the context of significant inflation, will be substantially below the experience of recent years,” he added.
Future Fund chief executive officer Raphael Arndt indicated that many of the tailwinds that have propelled investment in recent years have now turned into headwinds, which will make it more difficult for investors to generate returns in the future.
Dr Arndt noted that the Future Fund portfolio continues to be positioned towards the middle of the range of risk settings.
“Over the past year, we have, however, made significant changes towards investments that rely more on investor skill than on market risk, in line with our thinking that such an approach will be better rewarded as rising rates and slowing growth will drag on market returns,” he explained.
“Our focus remains on protecting the portfolio from a range of scenarios, including sticky inflation leading to prolonged higher rates and the risk of a global recession, while seeking opportunities to generate long-term returns.”