Sovereign wealth fund goes negative for the first time since the GFC

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September 03 2020
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The Future Fund has posted a rare negative return for 2020 and warned that a “challenging and volatile” economic climate could hurt previously strong gains moving forward.

Sovereign wealth fund goes negative for the first time since the GFC

The sovereign wealth fund delivered a return of negative 0.9 per cent through “an unprecedented year”, its first negative return since the tail end of the GFC.

The fund now stands at $161 billion, with over $100 billion in earnings on $60.5 billion of capital since the fund was established in 2006.

The fund was set up in 2006 to offset the Commonwealth’s pension liabilities and has previously stated its objective of returning 4 to 5 per cent above inflation without taking excessive risks.

While falling short of the target in 2020, the fund remains well above it over the long run, adding over $100 billion to the federal government’s bottom line through investment returns.

As part of its strategy to grow without large risk, Australia’s sovereign wealth fund has increased its cash holdings in June to $27.4 billion or from 9.6 to 17 per cent of assets, citing risks in the market.

Chief executive Raphael Arndt said the reasoning for the rebalance was due to the global economy being pumped full of stimulus money, meaning the real pain is yet to be felt in asset valuations.

“There is not a lot of distress baked into asset pricing, but there’s certainly the potential for that to emerge as the stimulus is pulled back over the next year or so,” Mr Arndt said.

Future Fund chairman Peter Costello also pointed to a rocky future for assets, citing caution moving forward.

“The second half of FY 2020 was dominated by the COVID-19 pandemic and the lockdown of much of the Australian economy by [governments] in response,” said Mr Costello.

“The [global] economy went into reverse and the Australian economy moved into recession for the first time in 30 years.

“The downturn was fast and steep… Future Fund has performed as intended through a highly volatile period, reducing the impact of market falls while looking forward to benefit as markets recover.”

Future Fund is now looking towards the recovery, positioning itself for “a challenging and volatile environment” that will likely lack the factors that have fuelled its strong performance over the last 14 years, and warns that it will need to be “ever more strategic” in how it pursues returns going forward.

“We will continue to prioritise portfolio flexibility, ensuring the portfolio is robust to a range of possible scenarios and has ample liquidity,” Mr Costello said.

“This will open up opportunities from the current market to position ourselves for long-term returns.”

Future Fund also undertook a “material rebalance” of its private equity portfolio, reducing some exposure to international growth and buyout managers,, while completing the sale of unlisted assets, including Gatwick Airport. Capital is now being redeployed into new infrastructure themes, including fibre and data centres both in Australia and internationally.

“We remain sharply focused on our long-term objective,” said CEO Raphael Arndt.

“Everything we do, every decision we make is focused on investing for the benefit of future generations of Australians. Now, more than ever, we are conscious of our obligation to avoid ‘excessive risk’.

“The changes in the global economy and financial markets are momentous, and we are positioned cautiously with risk levels just below neutral.”

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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