Future Fund prepares to sell infrastructure assets as portfolio value rises

Thanks to a weak Australian dollar and increased valuations, the fund’s infra allocation has increased to 8.5% of its overall portfolio.

The Future Fund’s allocation to infrastructure and timberland increased by A$1.76 billion ($1.25 billion; €1.10 billion) in 2018, but the fund is preparing to sell illiquid assets to give it headroom to cope with increased volatility.

The Australian sovereign wealth fund’s allocation to infrastructure and timberland stood at A$12.5 billion as at 31 December 2018, up from A$10.8 billion on 31 December 2017, according to a portfolio update issued by the fund.

Its allocation to the asset class now accounts for 8.5 percent of the fund’s A$147 billion portfolio, up from 7.7 percent in 2017.

Despite this, Future Fund last year began preparing to sell around A$5 billion of “illiquid assets”, according to a statement from chief executive David Neal. While Neal did not go into specifics about asset classes, a spokeswoman confirmed that the A$5 billion includes both infrastructure and property assets.

In the statement, Neal said: “We continue to focus on our disciplined approach to managing the Future Fund’s risk and return objective.

“With rising risks around the economic cycle and geopolitics, and generally fully valued asset prices, our portfolio construction continues to emphasise and balance diversification and flexibility and we are managing our liquidity closely.

“We have continued to gradually reduce risk in the fund’s portfolio. In 2018 we commenced work to sell around A$5 billion of illiquid assets in order to prepare for potentially increased volatility and to increase portfolio flexibility.”

When asked why the Future Fund’s allocation to infrastructure and timberland had increased in 2018, the fund’s spokeswoman said: “The Australian dollar has been weaker and much of these assets are in US dollars, so that automatically tends to mean that the value goes up when we record the value in Australian dollars.

“The other [reason] is that our private market assets are performing strongly and so the values have been increasing.”

The portfolio update also revealed that Future Fund had achieved 10-year returns of 9.7 percent per year, exceeding its annual benchmark target of 6.6 percent for that period. It achieved returns in the year to 31 December 2018 of 5.8 percent, exactly on target.

This was well above the median growth fund return of 1.8 percent in the 11 months to end of November 2018, according to data published by superannuation research firm Chant West in December. It estimated then that further share market losses in the first half of December could reduce annual returns for 2018 to 0.5 percent for the median growth fund.

The fund reorganised its investment team in 2018, splitting roles by asset class and creating five new positions. James Fraser-Smith was appointed head of unlisted infrastructure and timberland at that time.