Australia Future Fund Bounces Back in Q1 | Chief Investment Officer

A strong equity performance in this year’s first quarter allowed the Australia Future Fund’s assets to recover from its December losses, growing to A$154 billion ($108 billion).

The fund bounced back 5% from the dismal showing in 2018’s final quarter, when it lost 1.2%, thawing the fund’s winter chill. ‘The last quarter showed strong returns in public equity markets, no doubt influenced by the US Federal Reserve’s decision to hold interest rates and easing US-China trade tensions,” said Peter Costello, who chairs the fund’s Board of Guardians.

That said, he added that the global economy will face structural challenges, including demographic shifts and high debt levels.

“Long-term real yields remain very low, indeed negative, in a number of major economies, which implies that long-term prospective returns will be lower relative to history,” he said.

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Overall, the sovereign wealth fund’s diversification has been an excellent long-term strategy.. Not only has the organization’s 10.4% 10-year returns trumped its 6.5% benchmark, but all across its various fund portfolios.

“The Future Fund continues to perform strongly against its investment mandate, delivering strong long-term returns without excessive risk,” said David Neal, the fund’s chief executive officer, who highlighted its work on the medical research portfolio, worth $A9.6 billion on March 31.

The portfolio, which holds a large amount in cash (33%), has beaten all of its benchmarks since its 2015 inception. It has returned 3.7% and 4.9% over the one- and three-year period, and 4% all-time (all benchmarks for these periods are 3%).

The long-only strategy allocates the rest of the assets to debt securities (24.1%), alternatives (17.2%), global equities (10.4% developed markets, 6% emerging), Australian equities (4.3%), private equity (3.1%), property (1.7%), and infrastructure (0.1%). That is expected to be further diversified over time, according to the Future Fund.

“As we navigate a complex investment environment, we are focused on constructing the most efficient portfolio possible for generating strong long-term returns,” said Neal.

Raphael Arndt, the Future Fund’s chief investment officer, was unable to be reached for comment.

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Tags: Australia, Australia Future Fund, Medical Research, Returns, Sovereign Wealth Fund

The economic growth report for the first quarter was very nice. Maybe too nice. Morgan Stanley thinks it’s a blip that has little to do with real growth—and is unlikely to be repeated in the near future.

Gross domestic product (GDP) expansion for the January-March period was a heady 3.2%, according to the US Bureau of Economic Analysis. That beat expectations of 2.2%. Let’s see whether the lofty 3.2% number is revised down in the second, more complete version expected to be released May 30. Slowing economies overseas, for instance, could well have a bad impact on domestic growth.

To Morgan Stanley’s economists, a lot of the boost can be explained by an unexpected surge in inventories (adding a 0.44 percentage point increase to GDP), a surge in net exports (1.2 point), and larger government spending (0.4). They didn’t view this as sustainable and are expecting the growth pace to slow to 1.1% in the second quarter, ending June 30.

The inventory build-up, the report surmised, likely “points to a large reversal in Q2,” the result of a throttling back in production as the system works off the backed-up goods in the warehouse. Personal consumption and business investment slowed in the first quarter, which may well be a precursor to a second-period dip.

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One surprise was a drop-off of imports, which allowed US exports to handily outdo them, thus counting as an overall plus for the US economy. While the Morgan Stanley report didn’t say so, one explanation for the import fall-off could be tariffs on foreign merchandise.

The rise in government expenditures was concentrated on state and local construction activity, possible related to the launching of infrastructure projects to improve crumbling of roads, bridges, and the like. Federal outlays dipped slightly.

Tags: Economy, exports, GDP, Morgan Stanley