Australia’s Future Fund falls short of target due to China economic slowdown and rising inflation
Australia’s sovereign wealth fund, the Future Fund, reported that it missed its return target for the fiscal year ending in June. The chairman of the fund, Peter Costello, warned that markets were underestimating the risks stemming from China’s economic slowdown and rising inflation.
Costello expressed concerns over China’s housing investment and debt fuelled growth model, which he believes is unraveling and clouding the investment outlook. He also highlighted persistent wage and service price growth, signaling that inflation and interest rates are likely to remain high for a longer period. This poses a risk to markets that have been pricing in a Goldilocks scenario of fading inflation without a recession.
We see elevated interest rates, and we see the possibility of our largest trading partner continuing in difficult circumstances, Costello stated, emphasizing the risks to the investment climate and the fund’s conservative positioning.
The Future Fund achieved a return of 6% for the fiscal year, falling short of its target return of 10%. In comparison, Australia’s two largest pension funds, AustralianSuper and Australian Retirement Trust, reported returns of 8.2% and 10% respectively over the same period.
To navigate the challenging investment environment, the Future Fund reduced its allocation to developed market equities and increased its cash holdings in the three months leading up to June 30. Despite global share markets experiencing growth during this period, with the U.S. benchmark S&P 500 index climbing 10%, the fund opted for a more cautious approach.
Cash levels within the Future Fund remain significantly higher compared to other similarly-sized Australian pension funds. Costello stated that the fund’s strategy involved reducing equity investments in favor of inflation hedges such as gold, infrastructure, and inflation-linked bonds.
While the first half of the year saw strong performance in equity markets, driven by several technology companies anticipated to benefit from artificial intelligence, the Future Fund opted not to heavily rely on this single theme. Costello highlighted that the fund had significant investments in AI through private equity and venture capital, which hadn’t risen as sharply as public markets.
The Future Fund anticipates that persistently higher inflation will lead to lower real returns compared to the average of 8.8% recorded over the last decade.
Established in 2006, the Future Fund was created to address the rising pension liabilities for public servants. It is currently one of Australia’s largest pension funds in terms of size.
In conclusion, the Future Fund’s failure to meet its return target for the year was attributed to the economic slowdown in China and the increased inflationary pressures. The fund has adjusted its investment strategy to adopt a more conservative stance, reducing equity investments and increasing exposure to inflation hedges. Despite facing challenges, the Future Fund remains optimistic about managing risks and delivering solid returns in the future.
