Future Fund to hit $158bn by 2027

The Australian SWF has lowered its expected return range by 0.5% for the next 10 years, as it says investors have been ‘squeezed up the risk curve’.

Australia’s sovereign wealth vehicle, Future Fund, expects to grow to more than A$200 billion ($158 billion; €133 billion) over the next decade, it said in its latest portfolio update, released on Thursday.

Future Fund had A$133.5 billion in assets under management as of this June, delivering a return of 7.9 percent per annum over the past 10 years. The return was above its benchmark of 6.9 percent, or CPI plus 4.5 percent per year. So far, the sovereign wealth fund’s investment returns have added A$73 billion to the original A$60.5 billion in contributions from the government since its 2006 inception.

The government decided in May this year to defer withdrawals from the fund and lower its return target by 0.5 percentage points. Its new benchmark return stands at CPI plus between 4 percent and 5 percent as the fund’s new investment mandate for the next 10 years. 

The SWF believes traditional defensive assets such as bonds remain expensive, which reduces their defensive characteristics over the year. “As a result, investors have been squeezed up the risk curve into assets such as property and infrastructure, making them highly priced,” said the fund in a briefing. “Asset values remain full, with high valuations somewhat reliant on the continuation of historically low interest rates.

“The investment environment remains challenging with prospective returns lower than in recent years and with the potential for market shocks.” 

Therefore, the fund looks to maintain lower-than-average portfolio risk exposures, and retain high levels of flexibility. In a bid to add additional returns or reduce risk, the fund also eyes idiosyncratic opportunities, including strategies that have low correlation with traditional risk assets. 

Future Fund’s private equity allocation as of end-June 2017 accounts for around A$15.5 billion, or 11.6 percent of its total assets, an increase from the previous year's 10.4 percent. The investor has backed buyout managers including Quadrant Private Equity, Apax Partners and Bain Capital, as well as growth capital-focused managers CDH Investments and FountainVest Partners.

With additional reporting by Carmela Mendoza