Future Fund plots course for investment recovery

Chairman of the Future Fund Peter Costello says the money ‘has to go somewhere’. Picture: AAP

If you have just endured a challenging year on the investment markets then rest assured, you are not alone, even the Future Fund has taken a hit with a rare negative result of -0.9 per cent for the year to June.

But the fund is making sure it is well set for whatever comes next: The message this year is clear: “The board is focused on positioning for what will be a challenging and volatile environment in the future.”

Because, as chairman Peter Costello explained, the rebound in the sharemarket this year has meant future economic growth has been brought forward and priced into share values already.

No wonder the fund is making sure it has plenty of cash with cash levels jumping dramatically to reach 17 per cent of the total portfolio — the figure was only 11.9 per cent this time last year.

More importantly, the fund has moved to “flexible” settings in global markets, which it has created by selling down some so-called illiquid assets such as transport infrastructure and private equity investments.

However, sharemarket holdings still dominate the fund with 19 per cent in developed markets and 8 per cent in emerging markets and 7 per cent in Australian equities. Over the course of the year the fund trimmed holdings in emerging market shares and lifted holding in Australian shares.

More broadly, the fund clearly made some big calls on unlisted assets. We did not get full details of the exits or related writedowns, but one included London’s Gatwick Airport, which we can assume the board does not regret.

New directions for the fund include a burst of enthusiasm for IT-related infrastructure such as data centres which were noted by CEO Raphael Arndt. Such enthusiasm from a major investor gives some indication as to why listed data centre group Next DC has doubled in price over the past year or how Telstra managed to get $416m in recently selling its Melbourne data centres to Centuria REIT.

CEO Arndt may also have buoyed the ordinary investor with an observation that just because you have poor economic conditions, it does not mean investments will do badly. A welcome note of hope to investors issued on the same day we got the worst Australian GDP result ever.

Clearly the fund is having an ongoing review of all its investing activity taking note of the exceptional nature of current investing where rates are at rock bottom and government policy worldwide is to keep them at these levels.

As Costello put it, money “has to go somewhere” while he clearly hinted the fund was considering lifting its presence in global distressed debt which is an area widely expected to run hot in the years ahead as economies recover from the COVID-19 crisis.

‘We remain sharply focused on our long term objective, ensuring the portfolio is robust to a range of possible scenarios and has ample liquidity. This will open up opportunities from the current market to position ourselves for long term returns,” he suggested.

Overall the fund is continuing to perform well ahead of its peers with a 10-year return of 9.2 per cent annually, comfortably exceeding its benchmark target of 6.1 per cent.