The Australian Government Future Fund is relying on long-term investment positions and a diverse asset portfolio to meet its annual growth target of 4.5%-5.5% above Australian inflation.
Chairman David Gonski told the Financial Services Council last week that the target had become much more difficult to achieve in the years since 2006, when it was set.
“It was set in 2006 … [when] the cash rate was 6-7% and the CPI was 3.5%,” he said. “If you just put it into cash, you could have 2.5%-3.5% over CPI. Oh, those were the days.
“I don’t need to remind you that the current risk-free rate today is CPI plus about 1%. So we are looking for 3.5%-4.5% above that.”
Gonski said the fund had returned 8.1% a year since 2010 and was now worth more than $85 million. The Future Fund aims to hold $140 billion by 2020 to fund public sector superannuation costs.
He said the Future Fund’s investments were organised around six key themes:
1. Debt and deleveraging
2. The interaction of policy and politics
3. Demographics in developed and emerging markets
5. Resource scarcity
6. Global inflation rates
Only about 10% of the Future Fund is invested in cash; 40% is in equities, with a particular focus on emerging economies, and 17% is in “alternatives”.
Gonski highlighted infrastructure, property and private equity as areas of interest, with the fund having invested in Perth, Melbourne, Sydney and Launceston airports in recent months.
Seventy percent of the fund is invested overseas.
Gonski said the Future Fund took a “flexible and dynamic” approach to risk – taking on higher levels of risk when the reward justified it – and took a long-term view of its results.
“We in Australia suffer, in my opinion in all sectors, from a short-term perspective,” he warned the conference. “In Asia, I don’t see it; I think they have an advantage in doing that.
“I think we’ve got to shy away from a focus on monthly or quarterly numbers.
“We [at the Future Fund] review the portfolio ratios regularly but we do so on the basis that we’ve set a course and unless there’s a real need to change, alterations are done on the periphery, assuming that our direction is correct.”
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