Markets: Follow the Future Fund

As the Future Fund clocks up returns well above its mandate, smaller investors can take a leaf out of its investment book.

Looking at the Future Fund investment strategy should inspire you to review your own.

While its most recent annual return of 15.4 per cent will not be imagined to be the benchmark, under new guidance there will be no reason for returns to be far from the Fund's impressive averages as global markets return to more sustainable growth rates.

As Mark Burgess departs the Future Fund, David Neal as chief investment officer will continue guiding the investment strategy (Burgess leaves the Future Fund on firm footingSeptember 5). Following the rules of diversification, the Future Fund’s assets are spread across the asset classes. And the sheer size of the Future Fund forced Neal and his team to seek out investments outside of the Australian shares preferred by domestic investors.

Studies have shown investors have a propensity to focus their investments in their home country due to familiarity with the companies. Perhaps it is time investors gave thought to the strategies pursued by those with the responsibility of managing Australia’s future wealth. 

Burgess was undoubtedly the catalyst of a distinct turnaround in performance and asset allocation. This was particularly commendable during a time when loose monetary policy, austerity and excessive debt plagued the global economy, increasing the weight of single investment decisions. The new managing director and president will need to continue to support Neal and the rest of his team.

What is clear about the strategy the Future Fund pursues is its consideration of the global economy and market, and the structural challenges facing these investment havens. Instead of attempting expertise in all markets, they have recruited a range of specialist managers focussing on a particular asset class to assist them.

Taking a single company approach or single asset class isn’t going to generate compelling returns over an extended period of time. That's a recipe for disappointment.

Admittedly, institutions and corporate investors have the buying power and sophistication to make direct investments in assets outside of those listed on stock exchanges, such as debt securities and also private equity. While they can be difficult to track down, there are available options.

Debt securities include mortgages, high-yield credit and corporate loans. Retail and self-managed superannuation investment fund investors often overlook these types of investments due to the perceived difficulty in gaining exposure to them. But these do perhaps offer more value than the favoured, listed floating-rate notes or hybrid securities – especially in a low-interest rate environment.

Another testament to the running of the Future Fund is the difference between the actual year-end asset allocation and what was flagged in the previous annual report. Having the conviction to deviate from the target asset allocation is not something fund managers or individual investors always have the nerve to do. 

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