But having seen the extraordinary volatility in private asset prices in the closing months of the financial year, the fund’s chief executive, Raphael Arndt, says the fund’s private equity and venture capital portfolio has shrunk by 5 % and 10% in the June quarter only: Future Fund decided to wait until it had collected audited results from all of its private investment managers before calculating its returns.
“If we were operating the same way funds do, which is to say, working with March valuations, we would have had a positive result of 2.4 percent,” says Costello, who is also president of Nine Entertainment, which owns The Australian Financial Review.
Private property and debt fell by about half that of private equity in the June quarter, while the value of the infrastructure portfolio actually rose, having shrunk sharply last year on the back of much weaker economic conditions. than those that occurred.
But the pain in private asset valuations may not go away; Arndt says there is both a lagging effect and a smoothing effect on private equity valuations compared to equity markets.
Trust that the corresponding amortizations have been made.
He argues that the large, unprofitable tech companies that have seen their share prices hit so hard in public markets “tend to be much more volatile than early-stage private equity and growth private equity, which It is the largest part of our portfolio. We believe our valuations reflect the market.”
Arndt is in the midst of a three-year program to restructure Future Fund’s portfolio and prepare for what he believes is a world where inflation and interest rates will be higher for longer.
The impact of this work can be seen in the fund’s figures for April-June, which showed a $7 billion reduction in cash versus the March quarter and a $4 billion increase in allocation to alternatives.
In Future Fund parlance, the group of alternatives includes the hedge funds that Arndt is increasingly turning to to find better-than-market returns.
Arndt said the macro hedge funds Future Fund invests with have returned 20 percent in 2022, with several individual macro hedge funds returning more than 40 percent.
The message is that stocks will remain soft
We believe that the ability [and] Alpha strategies are really valuable and for us they remain private and venture capital, private infrastructure, property, and in particular macro hedge funds because we think they can do very well in an environment where stocks are falling and the inflation is going up,” he says.
Most of these asset classes are out of reach for mom-and-pop investors, making it more difficult to draw lessons from the Future Fund portfolio.
Perhaps Costello’s most accessible message is that the Future Fund believes stocks will remain soft as interest rates continue to rise with, in his view, no end in sight, given that central banks don’t know where the neutral rate (which neither supports nor detracts from economic growth) actually is.
But we can also learn from the challenge that the Future Fund faces in reaching its return target, which is set at inflation plus between 4% and 5%, “with an acceptable but not excessive level of risk”.
The minus 1.2 percent return delivered in 2022 was a far cry from the Future Fund’s target rate of 10.1 percent; Costello acknowledges that the CPI-linked target “wasn’t written for periods of high inflation,” and may have to change if the world faces “long periods of double-digit inflation or something like that.”
the world has changed
Arndt says Future Fund has one thing going for it that some super funds might not: It has adjusted early to this new world order.
“Clearly, we cannot affect inflation or the overall performance of the markets, and rising inflation is very detrimental to the investment markets. But we can take some steps to build a portfolio that’s more resilient for that world, and that’s exactly what we’re doing.
“Any other long-term investor and most superfunds that also have increased inflation targets that they have promised their members, they need to understand that the world has changed.
“They need to start investing differently if they are going to have any chance of meeting the goals they have set for themselves.”
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