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

Australia’s sovereign wealth fund Future Fund delivered a 10-year return of 9.2 per cent per annum as at September 30 this year, exceeding a benchmark target of 6.5 per cent, largely on the back of an enhanced exposure to private equity.

In its quarterly update, the Future Fund said that the value of the fund as at September 30 this year was $105.6 billion (A$148.8 billion). The fund increased its allocation to PE this year to 14.8 per cent from 11.8 per cent last year.

The capital seems to have been shifted from cash that stands at 14.4 per cent of the fund currently, compared to 18.9 per cent in the same period last year.

“Global economic growth remains steady across most major economies. Inflationary pressures are gradually building in the US and markets continue to respond to rising interest rates. While the short-term economic outlook remains reasonably positive, we remain cautious about the longer term outlook, the impact of geopolitical and trade tensions and the potential for shocks to markets,” said Future Fund chairman Peter Costello.

Since 2006 when the Future Fund was established, investment returns have added A$88.3 billion to the original contributions made by the government which were $60.5 billion at the time of transfer. No government contributions have been made to the fund since 2008.

While the government is permitted drawdowns from the Future Fund from July 1, 2020, it announced in the 2017-18 budget that it will refrain from making withdrawals until 2026-27.

“The expected continued growth in the portfolio as a result of this decision will considerably strengthen the Commonwealth’s position. A longer time frame will give the opportunity to further develop and take advantage of the attractive opportunities offered by private markets in particular,” the fund said in its Annual Report for 2017-18.

In its Annual Report, the fund noted that the private equity strategy reflects its view that the asset class fulfills two functions within the Future Fund’s investment portfolio — to invest in high ‘alpha’ opportunities and to expose the Fund to investment themes that it cannot readily gain exposure to through other more liquid investments.

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