With over $130 billion under management the Future Fund is one of the largest sovereign wealth funds in the world, and has achieved an annual return of 7.8 percent since inception.
The Fund has the scale to access opportunities unavailable to most investors. There are however, valuable lessons to be learned from its investment approach.
The Future Fund Board believes that an investor who can take ‘acceptable but not excessive’ risk, and tolerate short term market volatility, will be rewarded with higher long term returns. A long term approach allows an investor to be patient, counter-cyclical and opportunistic, and to take advantage of compelling opportunities to buy when other investors are selling.
Keeping a variety of different assets in a portfolio balances holdings and helps protect returns. The Fund uses a widely diversified portfolio, including Australian and global equities (in both developed and emerging markets), high grade and high yield debt securities, and a range of alternative investments, discussed below. It also holds 21 percent cash, to allow flexibility as opportunities arise, and to reduce portfolio volatility.
As at June 2017, the Fund held approximately 40 percent of its assets in the alternative asset class.
These investments are considered uncorrelated to the more traditional equity and bond markets, meaning they do not behave in the same way. They include investments in private equity, property, infrastructure, timberland, and hedge funds. Many of these investments attract a premium return to compensate for their lack of liquidity. Alternatives can be likened to an insurance policy, helping to smooth out portfolio returns over time.
In its June 2017 report, the Fund listed almost 120 carefully selected expert external managers to whom it delegates the responsibility of seeking out the best available investment opportunities around the globe.
The Fund rigorously manages market exposures through these managers, ensuring there is not excessive risk concentration in any one manager or sector. A regular review process ensures managers have a detailed understanding of the Fund’s investment strategy, and are performing to expectations.
The Fund adheres to international best practice in applying environmental, social and governance (ESG) principles to its own operations, and to the external managers it chooses.
It aims to collaborate with its managers to continuously raise the governance bar. ESG factors include occupational safety, human and labour rights, climate change, corruption, bribery and board diversity, and the Fund has specifically excluded companies involved in military weapons and tobacco from its portfolio.
The Fund believes ESG issues have the potential to materially impact investment performance and/or reputation, and integrates an ESG approach across all investment functions as a core risk management tool.
Innovation and technological disruption
The Fund has an existing program of investing in companies involved in innovation via its venture capital portfolio exposures. As part of its next evolution, it has also begun to focus on capturing insights into the current innovation and technological disruption wave. These will be incorporated into its decision making and portfolio construction in order to fully understand the risk disruption poses to existing investments.
The establishment of Australia’s Future Fund was a visionary concept. Elements of its philosophy can provide valuable insights to private investors returns.