Future Fund CIO to investors: Question infra assumptions due to coronavirus

Future Fund recorded a -3.2% return for the quarter to end of March 2020 and has not yet revalued its unlisted assets.

The coronavirus pandemic could be “a good time for investors to question the assumptions they might have made” around infrastructure assets, Future Fund chief investment officer Raphael Arndt has said.

See all Infrastructure Investor’s coverage of coronavirus and its impact here.

Speaking during a media briefing this week as Australia’s sovereign wealth fund gave an update on its performance to the end of March 2020, Arndt said that the fund had not yet revalued its unlisted assets because it does not have people trading in and out of the fund in the same way a typical superannuation fund does. Future Fund will instead carry out its usual valuation process with independent auditors at the end of the financial year on 30 June.

Overall, Future Fund’s assets under management now stand at A$162 billion ($106 billion; 98 billion) as of 31 March. The fund recorded a return of -3.2 percent in the quarter to end of March, with the financial year to date return now at -0.2 percent. Its target return for the financial year is 4.7 percent.

Arndt compared this positively to the ASX200 which fell 23.1 percent in the quarter and the S&P 500 which fell 19.7 percent in the quarter, saying it showed some of the fund’s defensive strategies in preparation for a potential downturn had worked as planned.

If the fund had revised the value of its unlisted assets downwards by 7.5 percent, roughly in line with revaluations seen by other superfunds, the return for the quarter would have been -6.6 percent.

Future Fund has A$12.6 billion allocated to infrastructure and timberland, equivalent to 7.6 percent of the fund. This is up from A$11.8 billion (7 percent) at the end of 2019 and slightly down from the A$12.7 billion (8 percent) allocation at 31 March 2019, the same period a year before the latest portfolio update.

On infrastructure assets, Arndt said that the main impact to date from the coronavirus crisis had been the impact on cashflows of GDP-linked assets. But he cautioned other types of assets may be affected, too.

“For other infrastructure assets, for example power and utilities – in an economic paradigm where unemployment around the world is going to increase significantly, in some countries to maybe 10 or 20 percent, I think it’s worth investors thinking about what the capability of those populations is to support essential utility bills under the current regulatory arrangements,” he said.

“We don’t necessarily take that for granted – we see pressure on utility bills going forward, or at least on the regulatory arrangements going forward. That’s one of the reasons we decided to sell [our stake in] Southern Water in the UK, because we could see there was more and more public pressure on keeping the cost of essential services low.”

Future Fund has been selling some of its illiquid assets for several years, beginning with infrastructure and property before moving onto private equity. This was to build up liquidity that would enable it to buy assets during a downturn, Arndt said.

“One of the reasons we’ve tried to maintain our liquidity at quite a high level was exactly for the purpose that if markets were to fall precipitously, then we could use that liquidity to take advantage of opportunities. That is definitely something we’re thinking about,” he said.

“We need to understand what the outlook is likely to be, and we’re still in the lockdown phase of this event, so we’re really only going to discover over the coming months whether the earnings destruction that we’re going to see in corporates will be offset by the government stimulus around the world or not. Things are fairly balanced, we think, at the moment – therefore we don’t think it’s a good time to be rushing out to buy things.”