Annual Return for Australia’s Future Fund Termed ‘Very Strong’

Australia’s Future Fund delivered a 9.1% annual return in fiscal 2024, adding A$18.8 billion ($12.65 billion) to its portfolio and bringing the Australian sovereign wealth fund’s total to A$224.9 billion ($151.35 billion.)

The performance in the year that ended June 30 lifts the Future Fund’s 10-year average annual return to 8.3%, exceeding a mandate target of 6.9%. Future Fund CEO Raphael Arndt said the strong result reflects the work done over the past few years to understand and navigate significant, lasting changes in the world.

“The changes in the investment environment and the resurgence of geopolitical risks of which we have been warning for several years continue to play out,” Arndt said in a statement. “As we have explained, our portfolio is now more robust to these events with relatively low exposure to fully priced equities, low exposure to interest rates and a range of inflation hedges in place. In this environment, I consider the annual return of 9.1% to be very strong.”

Notably, a Future Fund position paper from earlier this year warned that the longer-term investment environment is expected to be more complex, volatile and ultimately more challenging for investors. According to the paper, forward-looking returns will be more difficult to earn, prompting a need to refresh how the Future Fund invests to continue meeting its investment purpose.

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Arndt also noted that equity markets rallied strongly over the year, thanks in large part to the strength of the U.S. economy and expectations that U.S. interest rates had peaked and would soon begin to fall. He added that private credit and alternatives also delivered strong returns, as anticipated by the fund’s view that inflation and rates would remain markets volatile.

“In a year where equities were the only strongly performing traditional asset class, many of our positions, and in particular our hedge fund portfolio, delivered,” he said.

Future Fund Chair Greg Combet said in a statement that the long-term investment success of the fund makes a valuable contribution to Australia’s finances.

“In taking up my role, I have been impressed with the culture of the organization, the capability of the team, and the investments of the fund in Australian infrastructure assets such as airports, a major port, renewable energy and telecommunications and data centers,” Combet said. “These are important investments in Australia’s future. Building on these will be a priority for me, particularly given the investment opportunities in transition.”

This article initially appeared in our sister publication, Financial Standard, which, like CIO, is owned by ISS STOXX.

Tags: Asset Allocation, Australia Future Fund, Greg Combet, Raphael Arndt

Small-capitalization stocks typically shine in presidential years, according to a Royce Investment Partners study of the last 10 cycles of the quadrennial national election. But that pattern does not seem to be holding in 2024, at least thus far.

With valuations between $300 million and $2 billion, the small-cap Russell 2000 Index has historically outpaced the large-cap Russell 1000 by almost three percentage points, with averages of 11.9% and 9.2%, respectively, starting with the 1984 contest.

That outperformance becomes even more pronounced after the vote: When looking at a one-year period following Election Day, the small-cap index averaged 20.1%, versus 16.8% for the large-cap benchmark. What about for the year leading up to Election Day? Large-caps are slightly ahead, averaging total returns of 6.3%, compared with 5.8% for small-caps. Consistently, after Election Day, small-caps get their upward bump.

That initial pre-election large-cap edge is persisting in 2024, albeit with just two months left before the balloting. So far this year through Tuesday’s close, the Russell 1000 was up 15.8%, while the Russell 2000 was ahead just 6.8%. In other words, small-caps have a lot of ground to make up to conform to the norm.

The turbulence in the U.S. political arena may explain the difference. This year “has already proven to be notable for its unpredictability, nearly unprecedented, and very much unprecedented events,” wrote Francis Gannon, co-CIO of Royce.

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He pointed to the attempted assassination of former President Donald Trump, the GOP nominee; the exit of President Joe Biden from the race and his replacement as the Democrats’ standard-bearer by Vice President Kamala Harris; “and extreme reversals in the polls.” Harris has erased Biden’s six-point deficit in national polls and is now slightly ahead of Trump.

Historically speaking, why do small-caps tend to outperform in presidential years? Another study done early this year, by Cambiar Investors, an asset manager, found that small-caps, especially value-oriented ones, are “often more nimble and locally focused [and] may benefit from specific policy changes or economic shifts that elections can herald. Their undervaluation, coupled with the potential for significant upside, makes them a compelling choice for investors looking to capitalize on election-year dynamics.”

Small-caps have been overshadowed in recent years by tech-dominated large-caps, especially with the popularity on Wall Street of artificial intelligence.

“The AI mania that has gripped markets for the past two years hasn’t done much for small stocks. Instead, all the attention has redounded to mega-caps like Nvidia, Microsoft, Alphabet and Apple,” wrote John Coumarianos, CEO of Mindful Advisory, in a fund analysis published last month in CityWire.

But the large-cap upward momentum began to slow this year amid fears of a recession, or at least an economic slowdown. Of course, small-caps are affected by such sentiments as well, but an accompanying dynamic is working in their favor.

The Federal Reserve, seeking to forestall an economic slide, is prepared to cut interest rates—and smaller stocks are often more dependent on debt than their sizable brethren. Thus, per a BlackRock analysis from April, “Should rates indeed decline, smaller companies stand to benefit disproportionately.”