Australia’s Future Fund delivers strong returns driven by high PE exposure

Australian sovereign fund Future Fund has delivered a return of 9.7 per cent per annum over the past decade, exceeding the target of 6.6 per cent, to touch A$147 billion ($105 billion) in value by the end of last year, strongly driven by its increasing exposure to private equity investments.

In contribution to the fund’s out-performance, private equity accounted for A$23.27 billion, or 15.8 per cent of the total allocation. That was much higher than A$16.8 billion and 12.1 per cent in 2017.

In its earlier quarterly update, the sovereign fund said it had planned to increase the private equity allocation to 14.8 per cent.

“Over the past year, the Future Fund’s diversified approach has continued to control risk levels whilst our management of the portfolio, particularly across private markets, has driven strong returns,” said David Neal, Future Fund’s CEO.

“We have continued to gradually reduce risk in the Fund’s portfolio. In 2018, we commenced work to sell around A$5 billion of illiquid assets in order to prepare for potentially increased volatility and to increase portfolio flexibility,” he added.

Future Fund identified that risks around economic growth, the normalisation of interest rates and geopolitical and trade tensions will make it harder to achieve similar strong results over the next 10 years. Therefore, in pursuit of long-term returns, disciplined risk management will be critical.

“The Future Fund’s objective is to strengthen the Government’s long-term financial position by maximising returns over the long term without taking excessive risk,” said Peter Costello AC, chairman of the Future Fund Board.

Established in 2006, the fund said, investment returns have since then added over A$86 billion to the original contributions made by the government, which were A$60.5 billion.

Since 2016, Future Fund has beefed up its private equity investments, which then accounted for 10 per cent of the portfolio.

Raphael Arndt, CIO of the fund, said in September 2016: “Hedge funds and private equity make up a material part of the Future Fund’s portfolio – two strategies that have not found great favour with many of our domestic peers. In my view, the role of Private Equity and particularly venture capital in our portfolio is more important now than it has ever been.”

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Increased PE exposure helps Australia’s Future Fund beat target returns