The coronavirus pandemic has caused a paradigm shift in the investment environment which has large consequences for portfolio construction for many years to come, the Future Fund said.
During a media briefing on the back of the sovereign wealth fund’s quarterly update, Sue Brake, Chief Investment Officer of the Future Fund, said the turbulence of last year is like to continue for some time.
“We think that this COVID-pandemic has really marked a turning point into a new paradigm, a multi-decade change. It has really changed the conditions for investing,” Brake said.
“We’ve gone from laissez-faire to big government. We’ve gone from in person to being online and we’ve gone from globalisation to, possibly, deglobalisation. It has implications for a range of aspects that we think about.
“It is a really interesting time to be an investor and thinking about those changes and what it means for a long term investor, thinking through the immediate turbulence of what we’ve seen over the last 12 months and what we probably continue to see in the near term,” Brake said.
Future Fund Update
The Future Fund reported a return of 9 per cent per annum over the 10 years to 31 December 2020. Despite the pandemic, the fund managed to remain in positive territory over the past 12 months, posting a result of 1.7 per cent.
Compared to 31 December 2019, the asset allocation of the fund showed higher levels of cash at 19.8 per cent of the main fund, whereas at the same time in 2019 the fund had 13.7 per cent in cash holdings.
Brake said this wasn’t so much about risk management, but more about flexibility.
We have been putting in place strategies in the portfolio that allow us to take the risk in a very cash-efficient way. But while the cash portfolio increased in size and it looks like we are more defensive, that is not the case
“It is about dry powder,” she said. “We have positioned the portfolio to be at our neutral risk setting. So we are not particularly defensive, but at the same time we want to be as flexible or as liquid as we can.
“We have been putting in place strategies in the portfolio that allow us to take the risk in a very cash-efficient way. But while the cash portfolio increased in size and it looks like we are more defensive, that is not the case.
“We are more flexible and keen to preserve the robustness of the portfolio but we are fully invested along with our neutral risk lens,” she said.
A New World Order
Brake was also particularly concerned about the possibility of rising inflation and said the fund favours assets that offer some form of inflation protection.
“We are very mindful of inflation. There seems to be not any sign of it soon, but over the horizon we care about, we are really interested in the assets that give us inflation protection over the longer term,” Brake said.
“It is also interesting that defensive assets are no longer defensive, given where interest rates are. So all of these portfolio construction concerns is where we put all of our effort at the moment and we have been pretty active in the portfolio in terms of repositioning for this new world order, or investment environment, we find ourselves in,” she said.
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