Australia is Killing It in the Long Game

How diversification is key to the nation’s sovereign wealth fund’s performance.

The Australia Future Fund’s Q4 report showed not only a small hiccup in its financials, but that the nation’s sovereign wealth fund is more than meeting its long-term goals.

Due to year-end volatility, the group lost 1.2%, or $1.3 billion, of its A$147 billion ($103 billion) portfolio. The slip came from equities, but that didn’t stop the Future Fund from meeting its one-year return target of 5.8%.

“Over the past year the Future Fund’s diversified approach has continued to control risk levels whilst our management of the portfolio, particularly across private markets, has driven strong returns,” said David Neal, the organization’s chief executive officer.

In fact, the fund’s performance shows how risk resistant the investment team really is when it counts, as it’s beaten all of its targets soundly going back to its 2006 inception.

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That is achieved by the fund’s goal of taking “acceptable but not excessive risk,” which it does via diversification. The fund allocates most of its portfolio to stocks (29.4%), as most investors do, but loads up on alternatives such as private equity (15.8%), real estate (7.2%), infrastructure and timberland (8.5%), and hedge funds (14.6%). Cash and bonds make up the rest at 14.5% and 14.6% of the portfolio.

According to the investment mandate, which established the return benchmarks, the fund has returned 7.5%, 8.8%, 10.5%, 9.7%, and 7.6% over the three-, five-, seven-, 10-, and annual periods. The goals for the timeframes are set at 6%, 6.1%, 6.3%, 6.6%, and 6.8%.

“We are focused on long-term performance and dynamically manage the portfolio so that is as robust as possible to a range of scenarios. In the current environment we retain high levels of portfolio flexibility to both withstand − and potentially take advantage of − any market dislocations that might arise,” Raphael Arndt, the Future Fund’s chief investment officer, told CIO. “Around a year ago we commenced a process of slowly reducing risk in the portfolio and increasing portfolio flexibility in preparation for an expected increase in volatility of financial market returns as the business cycle matured.” 

The Future Fund’s portfolio didn’t shift a whole lot from Q3 to Q4, but the Australian sovereign wealth fund noticeably cut and levered in a few places. It shaved some of its weight in equities (about 2.4 percentage points), infrastructure and timberland (0.3), and hedge funds (0.4). Private equity, property, bonds, and cash got a little boost in the quarter, as they added one, 0.2, 1.3, and 0.1 percentage points. Emerging markets stocks were the outlier, as the organization left that area’s 7.3% allocation alone. 

“We have continued to gradually reduce risk in the fund’s portfolio,” said Neal, who added that the organization unloaded about A$5 billion of illiquid assets in 2018 “to prepare for potentially increased volatility and to increase portfolio flexibility.”

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