Strong first quarter buoys Future Fund

THE Future Fund outperformed the average Australian superannuation fund last financial year, thanks to a single quarter of strong growth.

By InvestSMART · 1 Sep 2012

By InvestSMART ·
1 Sep 2012

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THE Future Fund outperformed the average Australian superannuation fund last financial year, thanks to a single quarter of strong growth.

The government-owned fund reached a peak of $77 billion in March after growing 5.4 per cent in the first three months of the year. It lost $37 million in the June quarter and in the first half of the financial year, but still finished with an annual return of 2.1 per cent. The median balanced superannuation fund returned just 0.4 per cent and top quartile of funds returned 1.1 per cent in 2011-12, SuperRatings says.

However, the Future Fund is not directly comparable to super funds because it has the sole purpose of covering the government's pension liabilities for public servants and the Defence Force after 2020.

The latest portfolio update shows the Future Fund has just a third of its money sitting in the stockmarket, with the managing director, Mark Burgess, saying there were still unresolved issues affecting confidence in global markets.

The fund has reduced its cash holding to just over 10 per cent of its $77 billion assets, while increasing its investments in private equity, property and timberland assets. The fund cut its investment in emerging markets from $4.2 billion at March 30 to $3.8 billion, and cut its investment in Australian shares from $8.4 billion to $7.9 billion by June 30. It has $13.4 billion in developed markets, or 17.5 per cent of total assets.

"During the financial year, investment markets were challenging as the situation in Europe and the US, combined with slowing growth in emerging markets, resulted in market corrections," Mr Burgess said in a portfolio update. "While market confidence returned during the year, as central banks provided greater monetary accommodation, the investment environment remains uncertain with a number of underlying issues still to be resolved."

The single biggest allocation of $14.6 billion is in alternative assets managed by a range of international hedge funds, commodity traders and other fund managers, mostly located in Britain and the US. Investment in debt securities have fallen from a high of 25 per cent at the end of 2009 to 18.3 per cent.

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Frequently Asked Questions about this Article…

How much did the Future Fund return in 2011–12 and how does that compare to typical Australian super funds?

The Future Fund delivered an annual return of 2.1% for 2011–12. That outperformed the median balanced Australian superannuation fund, which returned 0.4%, and the top quartile of super funds, which returned 1.1% for the same period.

What drove the Future Fund’s outperformance versus super funds in 2011–12?

The fund’s outperformance was largely driven by a single strong quarter: the Future Fund grew 5.4% in the first three months of the year and peaked at $77 billion in March. Although it lost $37 million in the June quarter and experienced first-half losses, the strong early-quarter gains helped deliver the positive annual return.

How is the Future Fund’s purpose different from ordinary superannuation funds?

Unlike retail or industry super funds, the government-owned Future Fund has a specific purpose: to help cover the government’s pension liabilities for public servants and the Defence Force after 2020. That objective means its mandate and long-term liabilities differ from typical member-focused super funds.

What is the Future Fund’s current asset allocation and where is its money invested?

At the time of the update, about one-third of the Future Fund’s assets were invested in the stockmarket. Cash holdings were reduced to just over 10% of the $77 billion portfolio. The fund increased allocations to private equity, property and timberland, held $13.4 billion (17.5% of assets) in developed markets, and maintained a sizeable allocation to alternatives and debt securities.

How large is the Future Fund’s allocation to alternative assets and what does that include?

The single biggest allocation was $14.6 billion in alternative assets. These are managed by a range of international hedge funds, commodity traders and other fund managers, mostly based in Britain and the US.

Did the Future Fund change its exposure to emerging markets and Australian shares?

Yes. The fund reduced its exposure to emerging markets from $4.2 billion at March 30 to $3.8 billion by June 30. It also trimmed its investment in Australian shares from $8.4 billion to $7.9 billion over the same period.

What happened to the Future Fund’s debt securities allocation?

Investment in debt securities fell over the period, declining from a high of 25% at the end of 2009 to 18.3% of the portfolio by the latest update.

What market risks did the Future Fund highlight when explaining its investment decisions?

Managing director Mark Burgess said markets were challenging due to issues in Europe and the US and slowing growth in emerging markets, which led to market corrections. Although central banks provided greater monetary support and confidence returned at times, the fund still saw the investment environment as uncertain with a number of underlying issues yet to be resolved.