Cash is king: Future Fund parks assets

THE Future Fund has transferred assets out of property, debt securities and alternative assets into cash holdings as it prepares to wait out a long period of "subdued economic growth".

By InvestSMART · 31 Jan 2012

By InvestSMART ·
31 Jan 2012

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THE Future Fund has transferred assets out of property, debt securities and alternative assets into cash holdings as it prepares to wait out a long period of "subdued economic growth".

The latest quarterly update also reveals the fund has increased its exposure to companies in emerging markets while decreasing exposure to developed economies, where the slowdown is expected to have the most impact.

The fund returned 1.6 per cent over 2011, ending the year at $73 billion. It lost money in the last six months of the year, with total assets declining 3.1 per cent from a peak of $75.1 billion at June 30, 2011.

"While there have been some positive signs in the US economy, underlying pressures remain and Europe continues to wrestle with debt-related challenges and the risk of recession. The prospect of a lengthy period of adjustment and subdued economic growth is generally apparent as signalled in global and domestic securities markets," the Future Fund chairman, David Murray, said.

"In this environment, the board continues to place a premium on patience and liquidity, ensuring that the portfolio is prudently positioned to take up attractive opportunities while avoiding excessive risk."

Developed market equities declined from 16.1 to 15.7 per cent, $11.5 billion of the total portfolio in the last quarter of 2011. This is the lowest allocation towards equities in developed markets since mid-2009, but the fund was only partially invested at that time.

Allocation towards emerging market equities increased from 4.8 to 5.1 per cent during the quarter, returning to a high set in June 2011.

Cash allocations are now at the highest level since December 2010 at 13.8 per cent of the fund, or $10.10 billion, up from 10.8 per cent at the start of the quarter and 8.8 per cent at June 2011. The Future Fund classifies cash as "Australian bank bills and deposits".

The sovereign wealth fund was established in 2006 to cover unfunded public sector superannuation liabilities. It started with $60.5 billion from budget surpluses and the sale of the final tranche of Telstra. It sold about 2 billion Telstra shares over four years and now holds 100 million shares in the telco.

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Frequently Asked Questions about this Article…

Why has the Future Fund increased its cash holdings?

The Future Fund moved assets out of property, debt securities and alternative assets into cash as it prepares to wait out a likely lengthy period of 'subdued economic growth.' Chair David Murray said the board is placing a premium on patience and liquidity so the portfolio can take up attractive opportunities while avoiding excessive risk.

How much cash does the Future Fund hold and how has that changed recently?

Cash allocations are 13.8% of the fund, equal to about $10.10 billion — the highest level since December 2010. That is up from 10.8% at the start of the quarter and 8.8% in June 2011. The fund classifies cash as Australian bank bills and deposits.

What was the Future Fund's performance in 2011 and how did total assets move?

The fund returned 1.6% over 2011, ending the year at $73 billion. It lost money in the final six months of the year, and total assets declined 3.1% from a peak of $75.1 billion at June 30, 2011.

How has the Future Fund changed its equity exposure between developed and emerging markets?

The fund reduced exposure to developed-market equities — allocation fell from 16.1% to 15.7% (about $11.5 billion of the portfolio in the last quarter of 2011) — while increasing allocation to emerging-market equities from 4.8% to 5.1%, returning to a high set in June 2011.

What assets did the Future Fund move out of to build up cash?

According to the quarterly update, the Future Fund transferred assets out of property, debt securities and alternative assets into cash holdings.

What is the Future Fund’s current investment approach given global economic conditions?

With signs of weakness in parts of the global economy and Europe facing debt-related challenges, the Future Fund is prioritising liquidity and patience, positioning the portfolio conservatively to avoid excessive risk while remaining ready to seize attractive opportunities.

What is the Future Fund and how was it originally funded?

The Future Fund is Australia’s sovereign wealth fund, established in 2006 to cover unfunded public sector superannuation liabilities. It began with $60.5 billion from budget surpluses and the sale of the final tranche of Telstra shares.

Does the Future Fund still hold Telstra shares and what has it done with them?

Yes. The fund sold about $2 billion of Telstra shares over four years and now holds 100 million shares in the telco, according to the update.