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The Future Fund: Lessons from Australia’s sovereign wealth fund

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ASX
June 2015

The Future Fund is one of the largest investment funds in the world. We look at some of the key lessons investors saving for retirement can take from its long-term approach.

The Future Fund has built an envious investment track-record – annualised returns have topped 8 per cent a year1 since it was launched more than nine years ago to help meet public servants’ unfunded superannuation liabilities.

It is a particularly impressive feat given the fund was launched just before the onset of the global financial crisis and, since then, managed through a range of market conditions.

While the fund has a unique structure, investors can learn much from its long-term approach.

Investment returns: what is a fair target?

The Future Fund has an aggressive long-term return target, aiming to outperform the rate of inflation by 4.5-5.5 per cent a year. By comparison, many super funds aim to outperform the rate of inflation by 2-3 per cent a year.

But the Future Fund has met its target, returning an impressive 8.2 per cent per annum from launch until March 2015, well above its minimum target of 7.1 per cent2  for the period. Initially funded with $60.5 billion between 2006 and 20083, its investment pool has now almost doubled.

To achieve this target, it has managed its money differently than super funds. This is partly a function of its structure. Unlike super funds, the Future Fund does not need to manage ongoing contributions and withdrawals and, in fact, doesn’t have fund members.

The first investment withdrawals are scheduled for no sooner than 2020, which has allowed for a long-term portfolio construction approach that investors saving for retirement can learn from.

Overseas equities

The Future Fund invests in Australian equities but holds significantly more offshore equities. Just 8.2 per cent of the Future Fund is allocated to Australian equities compared to 20.8 per cent in global equities and a further 9.5 per cent in emerging markets4.

By comparison, the average self-managed super fund (SMSF) holds around half of its portfolio in Australian equities and an insignificant amount in global equities5.

There is a world of opportunity that many investors are missing out on with the Australian sharemarket representing less than 2 per cent of global equity markets. A healthy allocation to global equities can also provide diversification benefits with the Australian sharemarket dominated by the financial and resource sectors.

Emerging markets – low to middle income economies undergoing substantial economic and political reform – can also provide potentially strong (although volatile) returns for long-term investors.

Emerging markets make up around 80 per cent of the world’s population and around half of the world’s gross domestic product, providing investment opportunities as they continue to modernise6.

Infrastructure, timberland, property and private equity

The Future Fund holds a significant proportion of its assets in assets such as infrastructure and timberland (6.8 per cent), private equity (9.6 per cent) and property (6.2 per cent)7.

Allocations to property, infrastructure and timberlands (which the Future Fund refers to as tangible assets) tend to provide consistent income streams which match, or exceed, the rate of inflation.

For example, in 2013-14, the Future Fund made infrastructure investments in gas-fired power generation plants and renewable generation greenfield opportunities.

These types of assets also help to diversify a portfolio and provide different return characteristics.

For example, one of the goals of the Future Fund’s private equity strategy is to target higher-returning opportunities compared to similar (but more liquid) equity investments. This includes buyout, co-investment or secondary private equity categories8.

A long-term view with a diversified portfolio

While the asset allocations within the Future Fund’s portfolio have been built to meet its unique structure and goals, they provide plenty of thought-provoking ideas for investors.
But perhaps the over-arching lesson for investors is one of diversification. It combines that with a long-term view, which it defines as 10 years, and dynamically manages the portfolio to account for changes in prospective returns and risks.

Diversification includes an allocation to assets such as alternative assets (13.7 per cent) and debt securities (9.9 per cent), which helps to iron out the ups and downs that beset all portfolios9.


1Future Fund March 2015 quarterly update. http://www.futurefund.gov.au/__data/assets/pdf_file/0011/6599/2015_April_Portfolio_update_to_31_March_2015.pdf
2Future Fund March 2015 quarterly update. http://www.futurefund.gov.au/__data/assets/pdf_file/0011/6599/2015_April_Portfolio_update_to_31_March_2015.pdf
3Future Fund financials and investment performance. http://www.finance.gov.au/investment-funds/future-fund/investment-performance/
4Future Fund March 2015 quarterly update. http://www.futurefund.gov.au/__data/assets/pdf_file/0011/6599/2015_April_Portfolio_update_to_31_March_2015.pdf
5ATO data. https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/Statistics/Quarterly-reports/Self-managed-super-fund-statistical-report---March-2015/
6Future Fund: Understanding Emerging Markets. http://www.futurefund.gov.au/__data/assets/pdf_file/0020/5780/2013_Position_Paper_Understanding_emerging_markets_A328108.pdf
7Future Fund financials and investment performance. http://www.finance.gov.au/investment-funds/future-fund/investment-performance/
8Future Fund 2013-14 annual report. http://www.futurefund.gov.au/__data/assets/pdf_file/0013/6304/Annual_Report_2013-14.pdf
9Future Fund March 2015 quarterly update. http://www.futurefund.gov.au/__data/assets/pdf_file/0011/6599/2015_April_Portfolio_update_to_31_March_2015.pdf