How the Future Fund built a TPA culture that scales

The total portfolio approach has allowed Australia’s sovereign wealth fund to capture the themes that will power markets and economies for decades to come, said director of thought leadership Craig Thorburn – but that doesn’t mean it’s not hard to scale.

When Thorburn joined the Future Fund as one of its first employees, the entire investment team could sit at the same desk. Twenty years later, Australia’s sovereign wealth fund has gotten a lot bigger. 

“It’s hard to scale; when you’re an organisation of 20 people, which we were, it’s easy to sit around one room, because you’re all in one room. When you’re 360 people across two different offices, this flavour of TPA – “joined up” – is hard to scale; it’s very resource intensive,” he said.

“You have a lot of meetings, because if you’re going to be collaborative, if you’re going to be inclusive, if you’re going to generate ideas and debate them openly and respectfully, there’s a lot of meetings where you have got to have these top down, bottom up contents. That’s difficult.”

The “joined up” flavour of the Future Fund’s approach to TPA is based on competition for capital, cross-team collaboration, risk management at the total portfolio level; and integration of top-down macro thinking with bottom-up asset class thinking. It’s tough to pull off, but one thing that makes it easier is that the Future Fund is no longer “building the plane as they’re flying it”. These days, it has better systems and “more instruments”. 

“That’s important, because attribution is important. We don’t have a reference portfolio; we are deliberately trying to be benchmark-agnostic. We don’t wish to be dictated to buy a benchmark, and our exposures highlight that,” Thorburn said.

“But what that means is that we’ve got sophisticated boards that continuously, as we become larger and more complex, demand more accountability in the context of results. We have learned to be better at attributing success.”

Thorburn said that the joined up approach has been particularly successful in private markets, and the Future Fund has been a “big investor” in property, infrastructure and private equity and credit since its inception.

“In the last 10 years, 60 per cent of our net alpha has come from private markets. We get a very different kind of return that you don’t necessarily get in public markets, and you get a very different kind of asset exposure compared to public markets,” Thorburn said.

“The third angle is that you get thematics – whether that be AI, energy transition, or, in our specific case, two or three national priorities – and the ability to use private markets to play into those thematics can’t be understated. What we then do through that competition for capital and that culture, we openly debate about what types of private market strategies earn their place in the portfolio and which ones retain their place in the portfolio.”

$10 trillion opportunity

Chris McIntyre, partner at Apollo Global Management, estimates the capital need of thematics like the energy transition, reindustrialisation and defence at around $100 trillion, with 30-40 per cent of that likely to come from the private markets, and banks and public markets funding the rest. But if investors only look at their exposure to those themes through the lens of strategic asset allocation, they’re going to be disappointed.

“We’re in a world where I think a lot of CIOs feel bar-belled and stretched. They had to go all the way up the risk curve to find the highest returns and make the maths work because cash rates were zero and now the world has shifted,” McIntyre said.

“Most people could be halfway to their goal just by investing in nominal government bonds, and so what we’re seeing is a moving down the risk curve and investment opportunities that live in this space that fit nicely in a TPA context don’t fit very well in a traditional SAA.

“There’s ample opportunity to earn your risk-adjusted return from a total portfolio perspective, but if you try to put it in buckets, it’s going to struggle, because buckets aren’t designed to handle those types of assets.”

Apollo is also thinking about how to apply TPA principles to its own business; some of the money it manages sits on its own balance sheet as a result of its 2022 acquisition of insurance and retirement services Athene, and so it is always looking for the “best risk/reward, wherever that may lie”.  

“With that lens on the world, what’s become really clear to us is that the alpha opportunities… are really in the spaces in-between things, where the capital has not yet formed,” McIntyre said.

“The good part about that mindset is that there’s often opportunity there; the hard part is that it doesn’t then fit into people’s portfolios in an obvious way – so we think TPA is a great reframe and way to have a dialogue about where things can fit, even if they don’t fit the perfect label of an asset class that might exist today.”