Future Fund lags behind long-term objectives

Australia’s $77.63 billion Future Fund is lagging behind its long-term investment objectives, achieving a nominal annual return of 5.2 per cent over the past five years.

The sovereign wealth fund’s latest quarterly report reveals that since its first contributions were made in May 2006, the fund has failed to meet its initial investment aims after its first five years.

The fund has an investment mandate of a 4.5 to 5.5 per cent return above the Consumer Price Index (CPI) measure of inflation over the long-term.

This 5.2 per cent nominal return is also currently below the benchmark set by the fund’s Board of Guardians of at least a 5 per cent return above CPI over rolling 10 year periods.

Board chair David Murray expressed confidence in the long-term investment strategy of the fund.

“The portfolio’s positioning and our dynamic approach to building and adjusting the portfolio, has helped generate solid performance for the fund since inception and positions it appropriately for its long-term mandate,” Murray said.

When the fund was founded, the investment mandate also prohibited the fund from engaging in excessive risk and acknowledged that returns may fall behind its investment objectives in the initial set-up period.

The fund improved its returns this year, posting a 12.4 per cent return for the year, up from 10.6 per cent the previous year.

However, the sovereign wealth fund’s latest quarterly report reveals it has experienced a flat final quarter of the year, achieving just an additional 0.6 per cent return.

Murray said the fund had achieved positive returns in a difficult environment.

“We have witnessed an extremely difficult economic environment over the last few years and this is continuing to present challenges,” Murray said.

More than $7.81 billion had been added to the overall value of the fund’s assets for the year ending June 30.

The Future Fund has sought to further diversify its portfolio and has boosted its allocation to hedge funds in the final quarter of the year and decreased its holdings of cash.

Since the beginning of April the Australia’s sovereign wealth fund has allocated an additional 2.3 per cent ($328 million) of its portfolio to alternative assets, which consist of a range of hedge fund and hedge fund of fund strategies.

This takes its total allocation to alternatives to $14.22 billion or 18.6 per cent of the portfolio.

In this quarter it appointed hedge fund managers Arrowgrass Capital Partners, Blackstone Alternative Asset Management and New York-based hedge fund Vermillion Asset Management.

Arrowgrass is a spin-off from Deutsche Bank and has a European focus, with a number of investment strategies including distressed investments and special situations.

It is unclear what investment strategies the Future Fund has sought from these managers but in its 2010 annual report, the fund said it was looking to diversify its hedge fund strategies beyond an initial focus on distressed and event-driven credit.

The Future Fund also listed in the report that its three largest sector exposures in alternatives were distressed and event driven strategies (38 per cent), multi-strategy/relative value (24 per cent) and macro directional (19 per cent).

Cash holdings have dipped below 10 per cent of the portfolio in the last quarter of the year, with the fund now holding 8.8 per cent of its assets in cash compared to 11 per cent at the end of the third quarter.

This continues a strategy of reducing cash holdings from the heights of 2009 when the fund’s cash holdings were as high as 41 per cent.

However the fund indicated in its 2010 annual report that it would maintain levels of cash sufficient to allow for opportunistic investments.

Since the June 30 2010 the fund has invested about 4.3 per cent of its cash into range of tangible and alternative assets.

The Future Fund’s board has previously expressed a desire to further diversify the fund’s holdings, particularly in private equity, infrastructure and property.

These asset classes ticked up by between 0.4 and 0.5 per cent during the last quarter of the year.

During the same period it cut back its exposure to developed market equities by 1.4 per cent and it now represents 21.3 per cent of the portfolio. It also marginally decreased its holdings of Australian equities which now represent 11.2 per cent of the portfolio.

All percentages are excluding the fund’s holdings in Australian telecommunications company Telstra.

Its Telstra portfolio, which it has been gradually selling down, returned 2.9 per cent for the year and 2.7 per cent for the quarter.