Future Fund pivots to ‘resilience’ against backdrop of ‘permacrisis’
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The news: Australia’s $261 billion Future Fund is planning to focus on portfolio resilience to protect its assets against intensifying geopolitical tensions and rising inflation.
The context: A 17 page position paper due for release on Tuesday sees the Future Fund outline its shift in strategy towards dealing with escalating pressures that could makes delivering consistent returns challenging into the future.
The AFR reports that the paper says: “With the increasing risk of more frequent and more intense novel shocks likely to occur across global economies, and social and environmental systems, a focus on resilience ensures our investment portfolio remains aligned with our long-term investment goals.”
The fund said that it has devised a strategy to deal with these issues, which include switching back to active equity fund managers who it believes will be “better rewarded in an environment where higher inflation and geopolitical risk make market returns less certain.”
The Future Fund has recast its scenario framework to develop multiple secular scenarios, focusing on supply side driven forces, as well as retaining multiple three-year scenarios, the paper explained.
It argues that the new framework more effectively capture the greater uncertainties associated with current world pressures, better meets the need of its private market teams with associated long-term horizons, and better inform its public market teams seeking to always improve their understanding of key market drivers. “Importantly it provides a common context to how we filter investment opportunities and make portfolio decisions.”
The fund will also buy $1 billion in gold, which acts as a store of value against geopolitical uncertainty and will favour “quality” stocks with pricing power and adding to Australian real assets like infrastructure and accommodation.
“By rethinking our approach to portfolio construction and how to better achieve our mandate, this focus on portfolio resilience ensures our investment portfolio stays aligned with our long-term investment goals,” the paper said.
Writing an op-ed for the AFR, CEO of the Future Fund, Raphael Arndt, said “Rather than representing a crescendo,” a series of global events over the past three decades “after which might follow a resolution and clarity about the aftermath, each of these developments simply built on the previous one. Ultimately, we remained and indeed still remain, seemingly poised on a perpetual inflection point – a permacrisis, if you like.”
Arndt said that the weaponisation of trade, the persistence of inflation, climate shocks and a rising cost of capital – these all have tested the very assumptions that underpin investment theory: the free flow of trade and capital, low and stable interest rates, 60/40 portfolios.
The sources: AFR, Raphael Arndt Op-Ed, Investment Magazine
