Future Fund muscles past annual target return, lags in March quarter

The Future Fund delivered a 7.9% return for the year to March 31, topping its annual target; though its quarterly performance undershot the benchmark.

The sovereign wealth fund returned 1.2% for the March quarter, below the 1.9% target.

However, over the long run, the fund has made a habit of beating the brief. It has returned 7.5% per annum over 10 years against a 6.9% target, and 7.8% since inception - also above the mandate target return.

The mandate target return is CPI plus 4% to 5% per annum over the long term, with an "acceptable but not excessive level of risk."

Future Fund chief executive Raphael Arndt said this was "a strong result" that reflected years of work to ensure the portfolio is "resilient and flexible to a range of scenarios."

"We're seeing consequential changes in geopolitical, economic, and market environments at the moment, and that is causing volatility and uncertainty for investors," Arndt said.

"Our expectation is that these conditions will lead to higher inflation and bond yields for an extended period. These are the conditions for which the portfolio has been built over the past five years, and it has behaved to our expectations in recent months."

Arndt also noted that investment gains over the past year had added $17.8 billion to the Future Fund, lifting its total value to a record $240.8 billion.

Global equities comprise the largest proportion of the Future Fund's asset allocation, totalling $80 billion, primarily in developed markets. Other substantial exposures include $36 billion in alternatives, $33 billion in private equity, $26 billion in Australian equities, and $25 billion in infrastructure and timberland, and $22 billion in credit.

Future Fund chief investment officer Ben Samild said that over the past year, there were "particularly strong contributions to performance" from alternatives, credit, and infrastructure and timberland asset classes. He added that returns also benefited from changes to the fund's currency mix and exposure to commodities, including gold.

"We continue to assess conditions and adjust the portfolio to manage risk and deliver attractive long-term returns in line with our investment mandate," he said.

Separate to its investment results, Australia's decisive election outcome has cracked open the prospect of a "dramatic redefinition" of the Future Fund's role and purpose, according to research platform Global SWF.

Global SWF said that for nearly two decades, the Future Fund operated under a commercial-first mandate, focused squarely on maximising returns to cover public sector pension liabilities - "a classic rainy-day fund."  But under prime minister Anthony Albanese and treasurer Jim Chalmers, "that model has now been decisively overhauled."

With public debt soaring, a housing crisis that's hitting the younger generation, and a climate emergency demanding decisive action, Global SWF said the Labor government is repurposing the Future Fund as more than just a passive investment vehicle.

The government is giving the Future Fund a new mandate to prioritise investments in national priorities such as housing, clean energy, and critical infrastructure.

"The widened mandate reflects the government's intent to channel institutional capital toward addressing Australia's most pressing socio-economic challenges," it said.

However, critics, including former treasurer Peter Costello, who created the Future Fund, and Angus Taylor, a frontrunner to lead the Coalition, see that as political overreach.

They've warned that overlaying political targets onto an investment mandate could lead to suboptimal returns, opaque decision-making, and mission creep.

For its part, Global SWF said, "the government must tread carefully."

Investing in housing or infrastructure that fails short of performance benchmarks could "weaken confidence" in the Future Fund's stewardship, it warned. Moreover, if performance falters, "the temptation to scapegoat political interference will grow."

"Strong, independent governance - combined with transparency, rigorous project vetting, and limited drawdowns - will be essential to ensuring this reorientation doesn't unravel," Global SWF said.