Future Fund goes defensive

Australia’s sovereign wealth fund, the Future Fund, has lost more than $2 billion in the September quarter, as global share markets tumbled – despite reducing its equity exposure and moving more into defensive assets, such as cash.

The latest quarterly results reveal the $73.18 billion fund lost 2.9 per cent, with chairman David Murray (pictured) citing a 13 per cent drop in the Australian share market and a 14 per cent fall in global equity markets during this period.

The fund lessened the potential impact of falling equity markets by reducing its exposure to equities and increasing its cash holdings from June 30.

Over the quarter, the fund sharply reduced its overseas developed-market equity holdings by 5.2 per cent to 16.1 per cent of the portfolio. The fund also marginally reduced its exposure to Australian equities and emerging market equities.

Cash holdings were increased by 2 per cent to 10.8 per cent of the portfolio.

The fund has also continued a gradual expansion of its alternative assets, which consist of hedge fund and hedge fund-of-fund investments.

The holdings of alternative assets have risen by 3 per cent from 18.6 per cent of the portfolio to 21.6 per cent.

In the fund’s annual report, tabled in Parliament last week, the fund states that it is diversifying its hedge fund strategy beyond the distressed credit investments it made in the midst of the financial crisis.

The hedge fund strategies have been expanded to include volatility- and commodity-focused managers with active management approaches.

As of June 30, the fund’s alternative investments were split as follows:

• 26 per cent in multi-strategy/relative value;

• 31 per cent in macro directional;

• 28 per cent in distressed and event-driven;

• 9 per cent in fundamental long/short; and

• 7 per cent in commodity-orientated.

The fund has also increased its private equity holdings from 3.9 per cent of the portfolio to 5 per cent.

While the fund took a hit in the September quarter, the sovereign wealth fund enjoyed its most successful annual result since it began investing in May 2006.

In its annual report, the fund reports a nominal return of 12.8 per cent for the year to June 30.

The board’s stated investment aim is to achieve a 4.5 to 5.5 per cent average real return over rolling 10-year periods.

This latest yearly result amounts to a real return of 9.2 per cent.

Since inception the fund has achieved an average nominal return of 5.2 per cent, resulting in a real return of around 2.2 per cent.

When the fund was formed, it was noted that it may initially fall behind its stated investment goals, as it rolled out its investment strategies.

In the annual report, Murray acknowledges the fund has initially underperformed its long-term investment targets, but expresses confidence in the fund’s investment strategy.

“While performance to date is below the long-term target, it demonstrates the quality of investment returns that the fund is capable of generating,” Murray says in his chairman’s report.

“During periods when many investors have suffered significant losses, the fund has been less affected. As markets have recovered the portfolio has generated positive returns.”

The fund lost 4.2 per cent in the year of the global financial crisis, but since then has achieved double-digit annual returns and exceeded its investment aims.

Under its mandate the fund must achieve its investment results with “acceptable but not excessive levels of risk”.

Murray says the fund expects to see the current uncertainty in financial markets continue as the global economy continues to undergo “significant structural adjustment over the years to come”.

In its annual report the board says that it expects modest, below-trend growth in a number of major developed countries as these countries tackle debt reduction.

The board is more positive about the outlook for emerging markets but sees continuing market volatility – and so is positioning the portfolio defensively.

“Elevated cash levels are held as a funding source for opportunities that we anticipate an uncertain future may present, and a defensive bias is embedded within the listed equities portfolio,” the report says.

In its annual report the fund also outlines its target asset allocation for the year ahead to June 30, 2012.

These allocations are listed below and contrasted with the current holdings at September 30.

FUTURE FUND: TARGET vs ACTUAL ASSET ALLOCATION