“The Future Fund has been positioned with lower risk. We had a period of substantial decline over the December quarter of 2018 and the portfolio performed as it should have,” he said.
The fund compared its 10-year performance with that of superannuation options in a graph showing that the fund’s returns were similar to those of the best growth funds but achieved at much lower volatility.
While the fund’s allocation to private equity, in particular venture capital, was integral in achieving its strong returns, allocations to some of the world’s top largest hedge funds, which delivered strong returns despite the equity market downturn, also helped.
The Future Fund is an investor in $US50 billion ($70 billion) quantitative fund Two Sigma, which is understood to have delivered a return of about 30 per cent before fees, and $US125 billion fund Bridgewater Associates, which achieved returns of about 20 per cent in 2018.
Future Fund chief executive David Neal flagged up the fund’s relatively low allocation to listed equites as another reason for outperformance.
“You see our portfolio having less listed equities than a lot of other funds with this sort of objective,” he said. “We have less exposure to market risk than many and perhaps more exposure to skills that can add value.”
The fund is not planning to allocate any more money to Australian equity-focused active fund managers. “I would expect that, given the global opportunity set for us to go and look for ways to add value, that attempting to put active managers in Australia is probably not high up our list of priorities,” Mr Neal said.
The Future Fund’s exposure to listed equities, which stands at 30 per cent, declined by $4 billion over the fourth quarter as equity markets sold off. The value of the fund’s positions in illiquid assets increased by $3.3 billion, to $61 billion. That included a $1.7 billion increase in exposure to debt securities.
Mr Neal commented that the fund’s holdings in private markets assets such as infrastructure increased in value even after the fund launched a $5 billion disposal program, selling stakes in assets such as Gatwick Airport, and real estate.
Some of the increase in value of those holdings came from a weaker Australian dollar, he noted, but the other factor was “quite the happy news” that the asset returns were very strong.
“So although we are attempting to trim our private markets and we are in the process of selling some others, the values have been going up so quickly, because they are so good, that the total value of the sector is rising.”
Even though some of these assets have performed well, the Future Fund said selling out of some elements of its private markets portfolio is part of its strategy to increase flexibility “to prepare the portfolio for what we think will be a more challenging next 10 years.”
Mr Costello said the fund did “see quite a bit of risk left in investment markets” after the heavy losses for equity markets in the final quarter of 2018
The slowing property market in Australia is one, tighter monetary policy in the US is another, as are trade tensions between the US and China, Mr Costello said.
“The residential property market has definitely turned down in Australia’s two largest cities – Sydney and Melbourne,” Mr Costello commented. “It turned down last year and it looks as if it is continuing to turn down. That has a wealth effect.”
Mr Costello linked the slowing property market in Australia to downward revisions for economic growth. “Forecasters are revising down their economic growth forecasts and that’s one of the reasons for doing that,” he said.
“We see some increase in the downside risks,” Mr Costello said. “The dial has moved a little more to the risk side.”
But the Future Fund is well positioned to meet those challenges with its portfolio positioning, he said. “Our portfolio should outperform in periods of downturn,” Mr Costello said.
Mr Neal commented that the portfolio hasn’t changed its stance. “We continue to emphasise risk management. That’s particularly the case at this point in the cycle when economic growth is continuing to slow.”
The fund has returned 9.7 per cent annualised over 10 years, tracking well ahead of its benchmark targeted return of 6.6 per cent per annum.
While the Future Fund performed better than most, volatility in the second half of 2018 did lead to a $1.8 billion decline in the value of its assets from $148.8 billion at the end of September to $147 billion by the end of December.
The Future Fund’s performance relative to superannuation funds has become a political issue amid suggestions from the government that the sovereign wealth fund should manage a superannuation option, a push rejected by parts of the industry.
On Monday Mr Costellosaid the fund was “not angling” and “did not aspire”to directly manager people’s super.
Mr Costello also criticised the National Australia Bank’shandling of its leadership crisis, sayingoutgoing chairman Ken Henry should not appoint the new chief executive.