“Central banks are responding by tightening policy, and more interest rate hikes are likely to be needed to achieve their inflation targets,” Costello said.
“We expect deglobalization, geopolitical tensions, trade barriers and high inflation to be a feature of the investment climate going forward.”
The negative quarter of 3.1 percent is the lowest performance since the March 2020 quarter when the COVID-19 pandemic outbreak rattled markets.
Hits and misses
The higher rate of inflation has raised the Future Fund’s absolute return target, as it is tasked with returning 4% to 5% above the consumer price index.
The negative 1.2 percent is below the current 10 percent return target, while the Future Fund’s three-year annualized return of 6.1 percent is now below the 7.2 percent target.
In all other periods, Future Fund is well ahead of its target and has enjoyed an annualized return of 7.8 percent since its inception in May 2006, above the 6.8 percent target, and has added $134 billion to the coffers of the federal government.
Chief Executive Raphael Arndt said the fund’s overall risk setting was rated “neutral.”
The fund had benefited from a higher allocation to alternative assets “where inflation-aware strategies have performed strongly,” he said.
Dr Arndt added that the fund was working to reposition the portfolio to succeed in a “higher inflation world”.
An analysis of the Future Fund’s asset allocation changes shows that its cash position fell by $6.8 billion.
This appears to have largely played out in alternative assets such as hedge funds, which are up by almost $4bn, while allocations for infrastructure and forests are also up by $2bn. Investments in debt securities and real estate also increased.
The value of the Future Fund’s listed stock investments decreased 10 percent in the June quarter to $55.6 billion, and its private equity holdings decreased 1 percent to $33.44 billion.
hard to compare
The Future Fund’s negative 1.2 percent return compares with the 3.1 percent negative median return on balanced retirement funds, according to researcher SuperRatings.
But making direct comparisons between the returns generated by pension funds and sovereign wealth funds can be difficult given tax considerations, liquidity requirements and mandates.
Dr. Arndt said that in a low-performing environment, the value of trained managers was increasing.
“We are focused on identifying and leveraging the skills of our managers, and finding new talent to work with so we can add additional returns or reduce risk.”
what they say
Following the release of the Future Fund’s performance, Mr. Costello and Mr. Arndt fielded reporters’ questions about the Reserve Bank’s failings, the interest rate outlook, retirement, the return targets that they are linked to inflation, emerging market risks and the purpose of retirement. .
Costello on interest rate hikes
“Australia will have to deal with these rate hikes. They have come very fast.
“Keep in mind that we were coming from an incredibly low base and in my opinion we are late in tightening the policy and we will have to move faster,” said Costello, who is also president of Nine Entertainment, publisher of The Australian Financial Review.
“This means there will be higher unemployment as we go forward. Unemployment is incredibly low right now. So [rate rises] probably alone [result in] return to levels of employment that do not drive up inflation. But we will have to adjust because interest rate hikes are coming.”
Costello on pending RBA review
“It is a very important point in modern society to hold governments accountable and central banks accountable. They are not infallible, and they must also be held accountable.
“We have to think of mechanisms to make sure that the central bank is accountable if it has an inflation target of 2 to 3 percent. Accountability must be given and if it is not delivered. There should be some consequences.
Costello on the RBA advance guide
“The orientation was wrong. That was the point. It’s okay to give guidance if it really guides you, but if it leads you down the wrong path, you’re in trouble. At Future Fund we do not rely on this guide; We’d be in a terrible position today if we had, but there are some young homeowners or investors who could have, and it didn’t do them much good.”
Arndt on private equity valuations
”We wait until we have all the results of the audit in the entire portfolio. Our private equity portfolio was down between 5 and 10 percent during the June quarter.
“When we look across our portfolio, of course, some of the big, high-profile public tech companies have gone down. They are very mature companies, they are not profitable or generate cash, but they are self-financing companies.
“They tend to be much more volatile than earlier stage private equity, which is the bulk of our private equity portfolio, and we believe our valuations reflect the market.”
“It’s natural that there seems to be a bit of a lag and a smoothing effect in private markets, because markets go up and down, up and down. It takes some time to reflect that in the portfolio.
“If we had gone with Private March [market] numbers – publicly traded numbers – we would have presented a plus of 2.4 percent [financial year return] That’s a delta of three and a half percent [difference] or $7 billion.”
Arndt on loans and debt
“We think floating rate lending in Australia is attractive in the world we’ve been talking about. We don’t have to worry about currency effects and Australian interest rates will track Australian inflation to some extent. And we have been increasing our exposure in that market.
In particular, macro hedge funds because we think they can do very well in an environment where stocks are falling and inflation is rising.”
Arndt on the risks of emerging markets
“We have been winding down our emerging market debt strategies due to the headwinds in this economic environment. We had little or no exposure to bonds, for obvious reasons in this environment.
“The macro environment with a rising dollar, high inflation and rising interest rates is bad for economies that need to import capital to finance themselves. We have seen that emerging market countries have to raise interest rates or face rapidly rising inflation, which is not a conducive macroeconomic environment.
“China has some significant economic challenges. In response to that, we have reduced our exposure to emerging market equities from 9% to just over 5% over the course of the year.”
Costello on The Future Fund’s inflation-linked return target
”This was probably written in the days when inflation was expected to be 2 to 3 percent. If you get an inflation rate of 6, 7 or 8 (percent), the CPI plus target will be extremely difficult to hit. In fact, in today’s environment, you just won’t.
“That is a big challenge. This goal was not written for the high inflation rate society. And hopefully inflation will come down and we can continue working to achieve the goal.
Arndt on the inflation target
“Clearly we cannot affect inflation or the overall performance of the markets and rising interest rates are very detrimental to the investment markets. So we can take some steps to build a portfolio that is more resilient for that world.
“That is exactly what we are doing. All other long-term investors and most superfunds also have inflation targets plus what they promised their members. They need to understand that the world has changed and they need to start investing differently to have any chance of meeting the goals.”
Costello on the purpose of retirement
“Retirement is there to provide people with retirement income and I don’t think we should lose sight of that fact. We have the only proof of purpose which is the benefit of the members. Retirement does not exist to be used by the government for its own purposes. Once you lose sight of that fact, I don’t know where it ends.
“My view is that the government taxes people to achieve all of its economic and social goals, but retirement is yours and should be directed for the sole benefit of you, the taxpayer, and the best return for you, the taxpayer. ”.