Euromoney, July 28 2017
When Australia’s Future Fund was established as a national sovereign wealth fund in 2006, it set out with a target return of 4.5% over the consumer price index. To March 31, that translates to a target of 6.9% since inception.
That was in the heady days before the financial crisis when, in Australia in particular, it appeared that the good times would last for ever and asset growth could be taken for granted. When one considers what has happened since, from the financial crisis to European sovereign debt, from bank recapitalizations to Brexit, that looks like a high bar. But the Future Fund has beaten it – 7.7% a year from inception to March 2017.
A large part of the reason it has achieved this has been its willingness to embrace alternative assets to a far greater degree than other sovereign funds, or indeed almost any large institutional investors. It has always been set out this way – some of its earliest internal hires were experts not in global equities but in forestry, infrastructure and private equity – but a closer look at its allocations reveals just how dramatically the fund has sought to sidestep the mainstream.
The fund’s official figures will tell you that 15.1% of its assets are in alternatives, which is already more than most sovereign or pension vehicles, but that is only a small part of the story. By alternatives, the Future Fund is only talking about hedge funds, market neutral strategies and the like. Private equity represents another 10.6%; infrastructure and timberland 7.6% more. If one considers property an alternative, add on another 6%. Now we are at 38.4%.
But that, says chief investment officer Raphael Arndt, is still not the full picture. “What you don’t see is that though 40% of the fund is in equities, a growing percentage of that is actually long-short hedge funds,” he says. “And probably a third of the credit is private credit. We own no bonds.”
So, by some definitions of alternatives, says Arndt, “it’s about 65% of the fund”. To call this a stand-out in the conservative world of sovereign wealth would be an understatement.