Key Takeaways
- Future Fund employs a "Total Portfolio Approach" and "one team, one portfolio" philosophy.
- The fund emphasizes forward-looking factor analysis and scenario planning over historical data.
- A 'nimble and flexible' investment strategy allows adaptation to changing market conditions.
- Future Fund leverages approximately 120 external managers, disaggregating alpha for compensation.
- Investment culture prioritizes collaboration, diversity of thought, and learning from mistakes.
- Proactive direct infrastructure investments were made to bypass misaligned fee structures.
- Current strategy includes significant cash holdings and reduced market exposure due to global risks.
Deep Dive
- Raphael Arndt began his career as a civil structural engineer designing oil platforms before transitioning to economics and finance.
- He pursued a PhD on private infrastructure policy to strategically enter the nascent field in the early 1990s.
- Arndt spent seven years at Hastings Funds Management, learning to be an investor and managing an unlisted infrastructure fund.
- He became CIO of the Future Fund after initially being hired for an infrastructure role and overseeing the sale of $10 billion in Telstra shares.
- Future Fund's investment strategy is described as 'nimble and flexible,' emphasizing adaptation over rigid historical practices.
- The fund assesses forward-looking metrics like the implied equity risk premium, analyzing long-term growth, corporate margins, and bond rates.
- Qualitative risk assessment involves debates on current economic issues, including potential impacts from rising interest rates on an indebted US economy.
- Geopolitical factors, trade disputes, and populist politics are identified as longer-term risks that could lead to lower economic growth and higher inflation.
- Initial attribution work showed that aggregated listed equity manager mandates largely canceled each other out, yielding performance only slightly better than beta minus fees.
- The fund's equities program focuses on capturing the equity risk premium and factor approaches like value and quality, implemented through low-cost external managers.
- While skill in investment management exists, technological advancements have reduced opportunities for alpha in equity markets.
- Manager compensation is disaggregated to identify and pay only for genuine stock-picking skill, separating it from beta and factor contributions.
- Future Fund prioritizes venture and growth equity over large buyouts, viewing the latter as levered equities.
- They seek private equity managers with demonstrable skill in improving businesses, focusing on outperformance over public market equivalents after adjusting for market timing and leverage.
- The fund invests $50-70 million in smaller private equity managers through funder funds, contrasting with larger direct fund investments of $300-400 million.
- Future Fund has made 20-30 co-investments in private equity and 40 in venture capital, which provide insight into manager processes and show performance in line with funds.
- Post-financial crisis, the Future Fund rotated into higher-risk assets and made initial investments in core infrastructure and property in 2009.
- A 'crash test' liquidity framework emphasizes flexibility, with over 15% of the portfolio held in cash for option value and to manage illiquid assets.
- Current asset prices are considered expensive but slightly less so due to strong earnings, yet concerns exist about a potential US recession within three years.
- The rise of populist politics globally is viewed as a consequence of the financial crisis and monetary policy, potentially leading to lower growth and higher inflation through protectionism.
- The Future Fund fosters a collaborative, team-oriented, and trusting culture that emphasizes empowerment and vigorous, open debate of ideas.
- Diversity of thinking, sourced from varied backgrounds and experiences, is considered crucial for robust investment decision-making.
- A no-blame culture is actively fostered, acknowledging that many decisions will be incorrect, with a focus on learning from mistakes and improving processes.
- Human biases are addressed through education by a chief culture officer, a psychologist, and by implementing changes to investment committee processes to encourage broader participation and more focused discussions.
- Future Fund prioritizes net returns over absolute fee levels, demonstrating a willingness to pay higher fees for value-added strategies in areas like private equity and venture capital.
- The fund proactively acquired Australian airports (Melbourne and Perth), valued at approximately $1 billion each, bypassing external managers due to misaligned fee structures and capacity issues.
- Following the direct acquisition, these assets were managed in-house rather than hiring external managers, to retain control over exit decisions and preserve the fund's culture.
- Manager selection for assets like airports involves competitive bidding, requiring managers to disclose operational costs and personnel time, with bonuses tied to agreed-upon performance metrics.