Best of both worlds

Last month, just as more clement weather was starting to reach Norway, the country’s rainy-day fund got cold feet. After two years of pondering whether to deploy some of its $895 billion in unlisted infrastructure, the Government Pension Fund Global made its decision known: a resounding “no”. The reason? Too risky, said the world’s largest sovereign wealth fund.

On the other side of the planet, an institution of the same nature is turning that logic on its head – and has been doing so for nearly a decade. Since its creation in 2006, Australia’s Future Fund has made a point of growing its initial pot of money by looking for areas where risk is being properly rewarded. And infrastructure, covered by a dedicated programme since 2008, plays an integral part in this mission.

“We don’t view infrastructure as a lower-risk asset class,” says Wendy Norris, head of infrastructure and timberland at the institution. “Our goal is to maximise returns.”

It didn’t take long for Future Fund to become much bigger. Having started life with A$18 billion ($14 billion; €12.4 billion) under management, it currently oversees more than A$118 billion. Government transfers have been crucial in filling its coffers, with budget surpluses allowing the Treasury to wire A$60.5 billion to the Fund in its early years.

But while Australia’s mining boom has since turned to bust, growth continues unabated, suggesting solid performance from the institution’s portfolio. In its latest report, the Fund posted a 7.7 percent annual return at the end of last year, above its 7 percent benchmark (the institution targets an overall performance of consumer price index plus 4.5 to 5.5 percent) since inception. Three- to seven-year assessments are equally flattering. Infrastructure, Norris notes, has been a solid contributor to this. “The portfolio is producing annual returns in the low- to mid-teens on a net basis. That’s in line with our original ambitions.”

The Fund’s infrastructure holdings represent some A$8 billion. That is about 7 percent of the overall portfolio, which is pretty much where the team wants the asset class to sit, she adds.


Having joined the Fund six years ago as a director in the infrastructure team, Norris is well acquainted with how the portfolio looked in its early stages. Prior to stepping up to the top role, she spent two years focusing on opportunistic strategies, which saw her get very involved with building the institution’s portfolio of managers in the US energy infrastructure space. But she was also key to sealing other investments, such as the Fund’s Australian airport deals.

When Raphael Arndt, her predecessor, was tapped to become chief investment officer in September 2014, a global search was started to find his replacement. Six months later, Norris emerged as the preferred candidate, on a mandate to implement evolutionary rather than revolutionary change, she explains.

“I’ve been quite involved in the strategies as we set them on the way through, so I felt a high level of ownership in the way we were running the Fund already.” But compared to the era Arndt presided over, there was one fundamental change. “During most of his tenure, we were in the build-up phase of our portfolio life. We were very much making sure that the right strategies were in place, that we had the right access to the manager universe,” Norris notes.

“While we don’t have proper allocation buckets to fill, the difference now is that we are at a point where we feel we have built the bulk of our exposure to the infrastructure space for now. We’ve actually got to that space in all the illiquid asset classes we target. So my role consists of critically thinking about how to optimise the infrastructure portfolio and maximise its contribution to the Fund’s overall performance.”

Since the institution zoomed in on infrastructure, the asset class’ role within the broader portfolio has been that of a diversifier. “We think it offers attractive risk-adjusted returns,” Norris says. Yet, while this is true at the whole Fund level, diversification remains a resolutely top-down matter. “Within asset classes, by contrast, we’re not looking to build balanced portfolios. We’re just looking for the best ideas. So we’re comfortable with having the infrastructure portfolio composed of concentrated exposures.”

What this means in practice is that the Fund does not aim for balanced diversification among infrastructure’s various sub-asset classes, a principle that ties in with the institution’s very raison d’être, Norris remarks. “The Future Fund’s role is not to be managing liabilities. So yes, we see attractive risk-adjusted returns in defensive parts of the infrastructure universe, but we’re equally interested in the opportunistic and value-adding ways of investing in the asset class.”


The Fund’s infrastructure approach comprises four distinct strands: Australia, offshore core, offshore opportunistic and listed infrastructure. The first and last currently account for about 30 percent of the portfolio each, while the second and third represent about 20 percent. This equilibrium may soon tilt in one strategy’s favour, however.

“At the moment, we are seeking to rotate some of the offshore exposure away from core and towards opportunistic, so we expect that balance to shift over time,” Norris says. Equally, it is not because the team is satisfied with its overall exposure to infrastructure that it is not deploying money. “Twelve months ago we were at the same level, but during that period we have been actively managing the portfolio and have allocated A$1 billion of new investments and commitments to funds.”

Driving this activity is a will to reposition the portfolio as the market shifts. “What we really want to do is find places where the risk we take is being best rewarded. And in infrastructure there’s been a greater compression of returns in the core, low-risk space than at the opportunistic end.”

When it comes to readjusting the portfolio, there are two sides to the coin. High valuations and liquidity in the core segment, for a start, have recently prompted the Fund to exit some of its lower-risk holdings. “We have taken a significant amount of capital out of our listed infrastructure portfolio, which is a good way to access core infrastructure,” Norris says, adding that the team is also in the process of divesting one of its core unlisted positions.

“At this point of the cycle, we think that the people that are interested in core infrastructure value these assets more than we do. And if you want to change the composition of your portfolio you have to do it when the markets are liquid. We wouldn’t want to be sitting here in five years’ time in an illiquid market wishing we’d made a move when the market was there.”

But maintaining the same level of overall exposure to infrastructure, all else being equal, means deploying as much money as you take out, which the Fund does through what it calls a “hybrid model”. “We try to get the best of both worlds by sustaining a small number of deep relationships with fund managers.”

That is not to say Norris does not understand the temptation, displayed by many of the Fund’s peers, to go down the direct route. “In infrastructure all assets are large and transparency over their cashflows and business plans means it’s often possible to understand quite deeply what you’re investing in. That’s why a lot of people will have direct investment teams even if they don’t have any for other asset classes. But we would deliberately like to keep our team balanced with other teams. The ‘one team, one portfolio’ maxim is at the heart of how we approach the market.”


Still, not going direct does not mean the Fund is happy to relinquish control. In fact, its hybrid strategy is geared towards retaining one crucial aspect of the investment process: the final word.

This discretion takes various forms depending on the strategy considered. In Australia, for instance, the Fund typically operates through separate accounts, whereby it entrusts managers with a notional allocation and mandates them to go out in the market. “We use them as an origination and execution force, but we retain control of the investment decision. So ultimately we control our portfolio construction much more directly than if we were investing in a fund.”

The rationale for this is easy to understand. “Partly, it’s because we’re much more familiar with the dealflow in Australia than anywhere else in the world.” So why not make it an exception and go direct? “Occasionally, there have been investments in Australia that we have originated and executed ourselves. But because we prefer to keep a small team, we only do it if we can’t find a better way to access the opportunity.”

Abroad, the Fund does not shun co-mingled vehicles. However, fund commitments again serve the broader purpose of keeping discretion on investments made. Crucial here are the reduced number of managers the Fund works with and the sizeable co-investment rights it requires. “At the moment, our offshore money is roughly equally split between funds and co-investments,” Norris says, adding that total commitments to single managers typically hover at around A$500 million.

Norris is very clear that co-investment rights are not being demanded on a whim. “We try very hard to build a reputation for being a reliable co-investor. We work on internal processes to be able to be responsive on the timeline we understand is required.” This is possible, she posits, because the team possesses direct investment skills. “We understand the importance of delivering our side of the bargain. We want to be the LP of choice for the managers we invest with.”

The list of happy few partners the Fund backs is a mix of global generalists and specialised firms. In the unlisted space, they include AMP Capital, Corsair Infrastructure Management, Global Infrastructure Partners, Oaktree Capital Management, HRL Morrison, Starwood Energy, Campbell Global, UBS Global Asset Management and Morgan Stanley Infrastructure, according to Future Fund’s website. RARE Infrastructure, now part of the US’ Legg Mason, and Deutsche Asset & Wealth Management take care of the Fund’s listed exposure.

The club’s composition is constantly under review, Norris says. It comes alongside a bench of managers the Fund can pick up should it decide to gain a foothold in new areas, such as emerging market infrastructure. Still, she does not expect the number of relationships to rapidly inflate: “The hurdle to add new managers is quite high.”


With Australia one of the world’s hottest infrastructure markets right now – and given that it is not exactly rare to see sovereign wealth funds deploying capital along political lines – it would not out of place to wonder whether Canberra is putting any pressure on the Fund to, say, acquire some of the more strategic assets being put up for sale.

Norris, however, is adamant such concerns would be misguided: “We operate independently of government with a clear risk and return objective in our legislation and mandate. The Fund has a board of guardians who are ultimately responsible for the investment decisions and who operate like the board of any corporate.”

“The Treasurer and Minister of Finance have the ability to appoint members,” she adds, “but under the legislation, board members are appointed on the basis of investment and corporate governance expertise.”

That does not mean the Fund is not eyeing the multibillion dollar privatisations of Australia’s grids and ports, though. “We like Australia because it’s the right currency, the right GDP correlation and the right CPI exposure,” Norris observes. And while she wouldn’t comment on individual transactions, she hints the Fund tends to prefer economic to regulate infrastructure.

In that sense, Australia also helps to balance the Fund’s portfolio. But even though currency mismatch is an issue with the Fund’s offshore investments, it predictably has a plan to deal with that. “We think of currency decisions at the whole portfolio level, looking at how it impacts liquidity of the overall fund. So we don’t hedge at the infrastructure level, but it’s something that is firmly on our radar all the same.”

Having a nimble team and an open mind is what makes Future Fund resilient in the current environment, Norris concludes. “The market has a lot of new investors coming into it. So we continue to look for more complex situations, places where things can be changed. And that means turning over more rocks.”