Future Fund managing director David Neal has been overseeing some risk reduction in Australia’s public service sector pension fund, increasing cash holdings and reducing equity allocations by a quarter.
But Neal has shared some insights on finding better yield in the current period of lower returns.
Over 10 years since the fund was formed, it has generated a 7.4% return a year, last financial year growing by 15.4% and adding $15.6 billion to the portfolio. The value of the Future Fund is $117.378 billion as of March.
However, the Future Fund’s portfolio return was flat for the nine months to March. At the same time the Australian and global developed listed equity market fell by more than 3% and emerging markets by more than 12%.
“This is a clear illustration of the lower return environment that we have been highlighting for some time,” Neal told the Stockbrokers of Association of Australia annual conference in Melbourne.
“We have brought down the level of risk in the portfolio during 2015 and 2016.”
The fund now has just over 20% in cash and its listed equity holdings have dropped below 30% from just under 40% a year ago.
“To be clear though our approach is not to leave markets and hide under the blankets,” he says. “There are still areas of opportunity.”
One is to look for opportunistic investments in property and infrastructure.
“Many investors are attracted to core assets in these sectors,” he says. “This has particularly been the case as investors have hunted for assets that throw off reliable income streams to replace low yielding bonds.”
That has meant these core assets are changing hands at relatively high prices and offer relatively low prospective returns.
However, the fund is pursing non-core assets with higher return profiles.
An example is a stake the fund bought in a vacant office building in New York. The property was refurbished and tenanted, turning it into a core asset attractive to a broader range of institutions and attracting a higher price at sale.
“We also continue to see opportunities in private equity, particularly in venture capital and early stage growth,” Neal says.
“This is particularly the case where bank finance and public market funding are constrained and we see this as an opportunity to access innovation and value creation.
“We have been particularly attracted to co-investment opportunities which provide us with increased exposure to quality opportunities.”