The Future Fund is concerned about the medium to long-term outlook for investments as the coronavirus pandemic has accelerated and exacerbated existing vulnerabilities and trends within the global political landscape and financial markets.
Last week, Australia’s sovereign wealth fund published its annual report for the 2020 financial year and for the first time provided a snapshot of its investment and organisational performance in a new report, “Year in Review”.
“What a year 2019/20 has been,” Raphael Arndt, Chief Executive Officer of the Future Fund, exclaimed in the report.
“We are living through a 1-in-100-year event in markets and the real economy, compounded by a significant public health event that is changing how society operates and profoundly affecting how we live and work.”
The fund expects the impacts of the pandemic to be long lasting and said it wasn’t clear what a “steady state solution” will look like. This makes the medium to long-term investment outlook “very uncertain and unusually risky”, the fund said.
Beyond its immediate effects, the COVID-19 shock and associated economic dislocations have likely accelerated and exacerbated existing vulnerabilities and trends within the global order. The resolution of these various uncertainties may fundamentally alter the global economic and investment environment in the years to come
Although the markets have partially recovered from the extreme volatility in March, buoyed by the fiscal and monetary policy responses and optimism about an economic upturn, this recovery does not reflect the economic reality, which remains severely challenged, it said.
“Challenges remain for policymakers in balancing the need for further income support during this period, potential fiscal cliffs as support is unwound, minimising distortions from extended policy intervention and long-term debt sustainability issues,” the fund wrote in the review.
“While there is optimism that a vaccine may soon be widely available, until this or an alternative is found the long-run economic costs and impacts from the pandemic will continue to mount.
“Extended periods of unemployment will harm job prospects and, combined with lost incomes, will cause substantial damage to household and business balance sheets that will take years to work through and also impair long-run economic growth prospects.
“Changes to household and corporate behaviour, combined with public health policy initiatives to either contain this pandemic or prevent future issues, will also have significant implications for certain sectors of economies and overall economic well-being.
“Beyond its immediate effects, the COVID-19 shock and associated economic dislocations have likely accelerated and exacerbated existing vulnerabilities and trends within the global order.
“These include: the global political and geopolitical landscape, how economies and societies function and interact with each other, how and what global policy tools are used to manage economies going forward, and how financial markets function and how portfolios should be constructed.
“The resolution of these various uncertainties may fundamentally alter the global economic and investment environment in the years to come.”
The Future Fund announced in September that it had ended the financial year with a slight negative return of 0.9 per cent.
During the year, it reduced the size of its debt portfolio as both available credit spreads and credit standards deteriorated, particularly in the more liquid sectors.
“Through March 2020, this created some capacity to re-enter such credit strategies, as well as for some opportunistic alternatives allocations to strategies aimed at capitalising on dislocations in high-quality fixed-income markets,” the fund said.
“Over recent years, we have sold or reduced our exposure to more than 30 individual illiquid positions across private equity, infrastructure and property as asset valuations rose and look-forward returns contracted.”
Our people have learned new ways of working. More remote working and greater flexibility offer the potential to support diversity and inclusion and this is an opportunity we want to harness
The Future Fund also rebalanced its private equity portfolio, reducing some of its exposure to international growth and buyout managers following a period of very strong performance.
“We also completed the sale of Gatwick Airport and deployed some of that capital into new infrastructure themes, including fibre and data centres both in Australia and offshore,” it said.
“Although we have actively reduced the size of our unlisted property portfolio as we have neared the end of the property cycle, we continue to hold unlisted property exposures in Australia and offshore.
“This includes some retail properties that are being actively managed to address structural headwinds which have been exacerbated by COVID-19.”
The fund protected downside risk to the portfolio through defensive positions in foreign currency, fixed income and a number of hedging strategies.
“The period of relative strength for the Australian dollar toward the end of the year has offset some of the gains of the recovery in equity markets,” it said.
“We remain of the view that a meaningful level of foreign currency exposure, to each of developed and emerging markets countries, can provide valuable diversification.”
Future of Work
Like many organisations, the Future Fund has experienced significant disruption from the coronavirus pandemic and many of its staff had to work from home for significant periods of time.
Most of its employees are based at its Melbourne headquarters and with the city experiencing a second wave of COVID-19 in mid-2020, working from home has become a defining feature of this year.
The fund indicated it wouldn’t return to business as usual when employees are able to come back to the office, but that it would use the experience to provide more flexible work arrangements to its staff and also to reach out to future employees who might not have the ability to come into an office five days a week.
“While the move to working from home was out of necessity as social distancing measures were introduced as a result of COVID-19, it will influence how we work going forward,” it said.
“Our people have learned new ways of working. More remote working and greater flexibility offer the potential to support diversity and inclusion and this is an opportunity we want to harness.”
The Future Fund is also looking to move into new offices. The fund will move from the 120 Collins Street office tower in Melbourne to Cbus Property’s Collins Arch skyscraper during October.
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