Asset AllocationOctober 30, 2024

Australia Future Fund Revamps Portfolio With Pivot to Active Management

The A$224.9 billion sovereign wealth fund has been targeting surging Japanese equities.

Reported by Michael Katz

Australia’s A$224.9 billion ($147.3 billion) Future Fund has repositioned its investment portfolio, making more than A$50 billion in changes that affected nearly every asset class, according to the sovereign wealth fund’s 2024 year in review.

“We began pivoting the organization to support our investment mission in a variety of ways, including refreshing our investment model and repositioning our portfolio,” Raphael Arndt, CEO of the Future Fund Management Agency, said in the report.

The Future Fund reported the move back to active management in listed equities, particularly Japanese equities, as part of its strategy to “rely on investor skill rather than market risk—more alpha—reflecting our belief that this approach will be better rewarded in an environment where higher inflation, interest rates and geopolitical risk make market/beta returns less certain.”

The fund cited “healthy corporate balance sheets, positive changes to corporate practices, and reasonable valuations” among its reasons for focusing on Japanese equities. That bet seems to have paid off so far, with the Tokyo Stock Price Index surging 41.34% in fiscal 2023.

“Our search for persistent alpha opportunities in the equity market continued over the past year, leading us to Japan,” the report said. “The Japanese equity market had been largely abandoned by foreign investors following decades of subdued equity market returns.” The fund added that “the market has been attractively valued, with structural tailwinds created by corporate reform strengthening our thesis for active engagement.”

The fund earned a 9.1% investment return for the fiscal year ended June 30, outperforming its benchmark’s 7.8% return to raise its asset value to A$224.9 billion ($147.3 billion). It also reported three-, five- and 10-year annualized returns of 4.5%, 6.7% and 8.3%, respectively. The three- and five-year returns underperformed the fund’s benchmark, which gained 9.3% and 7.9%, respectively, over the same periods. However, over the 10-year period, the Future Fund reported annualized returns of 8.3%, topping its benchmark’s 6.9% return by 140 basis points. Since its inception in May 2006, the Future Fund has earned 7.7%, ahead of its benchmark’s 7.0% return.

“For an 18-year-old institution the Future Fund has already had a significant bearing on Australia’s economic landscape, growing from $60.5 billion at inception to $225 billion at 30 June, without additional contributions from government,” Future Fund Chairman Greg Combet wrote in the report.

The Future Fund also manages six other funds that are collectively worth A$64 billion and have produced earnings of A$12 billion to be distributed or re-invested. Each is intended to provide funding for specific goals, such as medical research, drought and disaster resilience, affordable housing, and disability insurance, among other objectives.

The newest fund, the Housing Australia Future Fund, was established by the Australian government during the past fiscal year and added to the Future Fund’s stable of funds. The housing fund, which was seeded with A$10 billion, is intended to provide funding for affordable housing in Australia, with a focus on addressing housing needs for groups such as indigenous communities, women, children and veterans.