Future Fund flags rocky road ahead for investors

The boss of the Future Fund has given investors a glimpse into the future and the road ahead could be a rocky, rough and potentially painful one.

The rest of everyone’s investment life starts right now – and it’s going to be extremely challenging at best, rocky and rough and potentially painful, at worst.

Indeed, it’s already started – according to the guy who’s got around $9000 of every single Australian’s money, in his pocket so to speak.

That’s Raphael – Raff – Arndt, the CEO of the government’s (your) Future Fund, and who played the central role in building it up to the $240bn it has today from the $60bn seed capital provided by former treasurer Peter Costello in 2006.

Arndt did so as investment head from 2014 from 2020 and then as CEO through the turbulence of the Covid years - and now heading into their (hoped for) aftermath. In the Covid years we got massive fiscal spending, pretty much from every government around the world; and zero interest rates and money printing that aggregated to several trillion dollars from the central banks.

Future Fund CEO Raphael Arndt.

As everybody now knows – lucky for some, painful for others - interest rates have been hiked sharply, again almost universally, in the wake of the inflation unleashed by all that stimulus and the impact of global Covid restrictions.

That’s, unleashed, with, a little bit of help from Russia (oil and gas and coal and food prices) and China (supply chain disruptions).

In a really quite seminal exercise, Arndt’s Future Fund (FF) has spelt out how the direct and immediate impacts of these massive shifts play into investment markets and likely returns; and so how professional money managers should in future be managing your money.

In short, very differently, to the way they have been doing so for the past 30 years – for many, for most of that period, effectively on ‘automatic pilot’ (my words not Arndt’s). The FF’s rather brief – it’s essentially a ‘wake up to a new reality’ broad overview - paper pivots off both those last few years and broader, deeper dynamic shifts. It argues this is overturning all the established mantras and processes that have ruled over investment, and worked so successfully, over those 30 years. The paper’s title captures this very clearly and bluntly: “The Death of Traditional Portfolio Construction?” I should stress, although it’s probably obvious, we are talking about non-property investment – for most, essentially where your super goes; into the share market, fixed interest and cash and a growing array of ‘alternative’ investments. Broadly, what ‘worked’ to generate strong and sustained returns way higher than the also sustained low inflation rates, was putting most of your money into shares and bonds and maybe playing around at the fringe with ‘riskier’ investments.

What big investors like the FF and Industry super funds could do, that you couldn’t, was play into all those new investment categories – private equity, infrastructure, ‘alternatives’.

What Arndt’s FF paper argues is that the way managers direct their investments will have to change. Yes, they’ve long since moved on from largely ‘investing the market’ -shares plus bonds plus cash – while trying to outperform by shifting weights and making some specific stock picks to over or under weight. But even the addition of new investment categories won’t be enough into this new world. Investment managers will have to completely rethink the very basics of investment paradigms; and do so in a continuous real-time context.

Two big things follow from the FF assessment.

First, your choice of a super fund will become far more critical than it’s been in the past. There will be very different long-term returns from those that ‘stay traditional‘ and those that embrace the Arndt challenge. Further, there will be far greater variations in performance within those funds going ‘non-trad’ than we see today. Finally, again I argue, it shows the desperate need to make the FF available to the retail investor.