Future Fund increases focus on private equity

Private equity (including venture capital) emerged as the Future Fund’s second largest area of investment behind listed equities over the second quarter of 2021.

At the end of June, private equity represented 17.5% of the fund’s investments ($34.485 billion) and listed equities 35.8%. At the end of March, private equity investments had represented 14.6% ($26.056 billion) and listed equities 32.1%.

At the end of the March quarter, the fund’s second largest allocation had been to cash at 18%. The allocation to cash was down to 13.2% at the end of June.

The fund’s allocation to alternatives, mainly hedge funds, also reduced from 14.4% to 13.5%.

Reporting on on 26 August, chief executive Dr Raphael Arndt said: “Listed equity markets performed strongly while our significant exposure to private equity has delivered excellent returns. During the year we committed to additional opportunities in Australian infrastructure, notably through a further investment into Powering Australian Renewables (PowAR), and a new partnership with Telstra InfraCo Towers.

“The strong returns of this year are the highest in the history of the fund. Over the medium-term, returns are going to be harder to produce, particularly given the shifts in the investment environment created by the pandemic.

“Given this, we believe that reducing some flexibility to move to a modestly higher level of risk is appropriate. We have adjusted the portfolio accordingly, initially through an increase in listed equity exposure. Over time we will increase our focus on skill-based and less liquid opportunities where we and our investment managers can create value.

“We aim to make the most of our long-term perspective and ability to dynamically manage the portfolio as a whole to help us target our return objective, while prudently managing risk.”

Over the full 2021 financial year the Future Fund achieved a return of 22.2%, the strongest in its history. The ten-year return was 10.1% compared with a target of 6.1%.

Chairman of the fund’s board of guardians Peter Costello, AC, said: “The return of 22.2% for the year to 30 June 2021 is an exceptional result. This has delivered $35.7 billion to the people of Australia, growing the fund to $196.8 billion. The fund has now earned $136.3 billion on the capital of $60.5 billion contributed by the government back in 2006-07, meaning it has tripled the money.

“This year has encompassed both the health and economic disruption of the COVID pandemic. The financial recovery has been driven by the deployment of vaccines, recovering confidence, and supportive monetary and fiscal policy.

“COVID-19 has accelerated many significant changes in the nature of work and in household use of technology. It has heightened pre-existing tensions between global powers. It has led to more extreme forms of monetary policy and even more expansive fiscal policy. It has accelerated the rise of bigger government.

“While the near-term economic outlook is brighter than it was a year ago, much of Australia is still in lockdown and longer-term there remains uncertainty on the unwinding of stimulus, changes to the global order and how policy makers will respond. This creates a challenging environment for investors.”

Responding to questions in an online media conference following the results presentation, Costello said the Future Fund had reduced its investment exposure to China in response to tensions between Australia and its largest trading partner.

“China is a big part of the emerging world and ordinarily we would be taking a big position in relation to that,” he said. “But given the difficulty in the relationship between Australia and China we have pulled back on allocations in China.”

Image: The Future Fund entered a new partnership with Telstra InfraCo Towers during the 2021 financial year.