Australia鈥檚 sovereign wealth fund has reported above-target returns as it shifts out of cash into infrastructure and alternative assets.
The Future Fund said it produced a total return of 7.8% in 2016, while its exposure to alternative assets, including real estate, increased from 12.6% to 14.2%.
Managing director David Neal attributed the increased exposure to infrastructure to the acquisition of the Port of Melbourne.
The Future Fund was part of a QIC-led a consortium, including Canada鈥檚 OMERS and China Investment Corporation, which bought Australia鈥檚 largest container port for AUD9.7bn (鈧�6.83bn) last year.
Neal said: 鈥淲e settled on the port in the last quarter.鈥�
The Future Fund has also committed AUD400m to AGL Energy鈥檚 AUD2bn renewable energy fund.
Total allocation to infrastructure and timberland was AUD10bn at year-end, 7.9% of the total portfolio.
Most of that was in infrastructure, said former Australian treasurer, Peter Costello, the fund鈥檚 chairman.
Costello described the 7% allocation to infrastructure as 鈥減retty decent,鈥� adding that not many investment funds鈥� infrastructure exposure would be 鈥渢hat high鈥�.
The Future Fund鈥檚 allocation to real estate was AUD7.9 billion, equivalent to 6.2% of its portfolio.
Neal said that the Future Fund had been de-risking throughout 2015 and 2016, mainly by reducing its equities investment.
He was comfortable with a 鈥渟lightly conservative鈥� position, but said: 鈥淲e are not expecting or forecasting major market dislocation.鈥�
Costello, who set up the Future Fund when he was Australia鈥檚 Federal Treasurer in 2006, said that, despite the challenging global environment, the fund had met its mandated return of 4-5% above inflation rate since inception.
The fund was set up with a federal government contribution of AUD60.5bn.
With consistent annual returns of 7.8%, that initial capital had grown to AUD127.7bn by 31 December 2016.
Costello said 10-year bonds, the benchmark for investment returns, were trading at around 2%, with a real return of 1% or less, compared to an historical return of 5-6%. He said such low returns and a risk environment would continue into the future.
The Future Fund鈥檚 existing mandate was 鈥渁 proper mandate for the last 10 years鈥�, but given the outlook for the investment climate, the fund鈥檚 mandate needed to be revisited for the next 10 years 鈥渁nd the government will consider this鈥�.
The government has instructed the fund not to take excessive risk, but still seeks a 4.5% real return.
鈥淭hose two objectives, which we鈥檝e managed over the last 10 years, will be rubbing into each other over the next 10,鈥� said Costello.
Under the current statute, the Australian government will be able to start drawing down on the fund from 2020.
