THE Future Fund will soon decide whether it will continue to invest in the tobacco industry, its managing director revealed at a portfolio update on Tuesday.
The regular quarterly update showed the fund's investments returned 12.8 per cent last year, increasing the portfolio from $73 billion to $82.4 billion. This was one of the fund's best performances and a significant improvement after returning just 2.1 per cent in the 12 months to June 2012.
It matches the median return of 12.7 per cent across industry and retail balanced superannuation funds, according to a Mercer investment survey. It also boosted the average annual return since inception in May 2006 to 5.4 per cent.
The fund's governance committee has been debating whether it should keep investing in tobacco companies, says its managing director, Mark Burgess, and was expected to make a decision in the "early part of this year". "We have not said we are going to exclude tobacco, we are just thinking about it," he said.
At present it invests between $230 million and $250 million in tobacco companies and tobacco-related industries. In 2011 the fund stopped investing in companies that build cluster bombs and landmines, but was still involved in the broader "armaments industry", Mr Burgess said. The decision to stop investing in the bombs was driven by the Australian government signing up to the global Convention on Cluster Munitions, which comes into effect in April.
Mr Burgess also dismissed criticism the fund had overvalued capital city airports in its $2 billion bid for Airport Infrastructure Fund. Co-investors in AIF, who have a right to bid for the airports before the Future Fund, have accused it of putting airports out of reach. Mr Burgess said all parties were going through a natural competitive process.
"We consider our relationships with institutional investors both here in Australia and the world to be absolutely critical to us ... and I am confident that those relationships are fine."
Meanwhile the outlook for stability in global market would depend on the European Central Bank continuing to "do whatever it takes" to stabilise and restructure the eurozone, and how governments unwind their unusually low interest rates.
Its chief investment officer, David Neal, said: "In that context we think markets are reasonably priced, [but] we don't see too many screaming bargains any more. [There is] lots of capital flowing into markets, in particular flowing into the tangible assets markets, and it has become very, very competitive."
The fund was now well diversified after starting its investment portfolio during the global financial crisis and with 2 billion Telstra shares, which have mostly been sold. The largest allocations as of December were to debt securities (19 per cent), developed markets (18 per cent), alternative assets (16 per cent) and Australian markets and cash (11 per cent and 10 per cent). Mr Neal said the fund would increase its weighting towards private equity and tangible assets - property and forestry - as it matures, and decrease debt and cash. It had little or no exposure to sovereign bonds from developed markets, but does invest in sovereign bonds from emerging countries.