The Future Fund marginally increased its exposure to private equity (including venture capital) over the September quarter.
The fund’s 12-month return fell by 0.5% over the quarter to 13%. This meant that for the 10-year period to the end of September the annualised return was 8.4%, still well over the target of 6.9%.
The Future Fund’s assets under management were valued at $205.2 billion on 30 September, down almost 25% from $256.2 billion at the end of June, reflecting falls across global markets.
Private equity made up 16.8% of the fund at the end of September. That was a marginal increase from 16.5% at the end of June and was still down compared with the beginning of the 2022-23 financial year when private equity accounted for 17.2% of the portfolio.
Private equity remains, however, the fund’s second largest allocation after total listed equities at 30.7%, also marginally up on 30.4% at the end of July.
The Future Fund clearly regards private equity as an important area of investment as it continues to position its portfolio to respond to a changing global environment, particularly regarding inflation.
Investments in alternative strategies (mainly hedge funds) were reduced from 17.0% to 16.7% over the September quarter, continuing a modest decline over the prior 12 months.
In a quarterly update issued on 27 October, chief executive Dr Raphael Arndt said paradigm shifts outlined by the fund’s management team in a position paper nearly a year ago − including higher inflation, greater geopolitical tensions and challenges to resource supply − had continued to develop.
“We continue to position the portfolio to respond to the changing environment,” he said. “Our focus is on enhancing resilience and increasing our allocation to investment strategies that can protect the portfolio against inflationary scenarios. While the risk of a global recession has receded, the persistence of higher inflation and interest rates continues to test investment strategies.”
Chair Peter Costello AC said: “Investment markets are going through a challenging period with falling share prices and bond investors pricing in higher long-term interest rates.
“Developed economies have been resilient so far to the rapid rise in official interest rates, the fastest increase in a generation. Labour markets have remained strong and housing and retail spending have held up well, with households drawing down on savings built up during the COVID pandemic.
“Sticky inflation shows that interest rates may well continue to rise. Commodity prices are elevated, and US long-term interest rates have risen sharply as markets begin to price inflation being higher for longer than previously expected.
“Looking ahead, the key issues remain the extent of further monetary policy tightening required to bring inflation back within central bank targets, how markets respond to those measures and whether the Israel-Gaza conflict turns into a wider regional war.
“The Board continues to take a prudent approach to positioning the portfolio. We are focused on maintaining a portfolio that is resilient to a range of scenarios and that balances our risk and return objectives. We expect that real returns will continue to be lower than in recent decades.”
Image: Whether the Israel-Gaza conflict turns into a wider regional war will be a key issue affecting Future Fund investment planning.