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Future Fund Avoids Large-Cap Buyouts Entirely in Private Equity Portfolio
“Our portfolio has no large buyout at all, because we think that, well, that makes the capacity so much harder, by the way, but we think that large buyout is really just levered equities, typically. And if there's skill added on top, and there might be, then mo…”
Arndt: Not enough alpha exists globally to actively deploy a $45B equity book
“Today the equity book is maybe forty-five billion dollars, and we're just not going to find enough skill out there in the world to invest forty-five billion dollars”
Future Fund manages zero assets internally, deploying capital via 120 external managers
“We actually don't manage any assets internally, so we use managers for all of our implementation, and we've probably got about a 120 or so managers on the books at the moment, and would like it not to grow too much more than that, just so that we have the band…”
Arndt: Large multi-strategy hedge funds often charge alpha fees for pure beta
“Those large hedge fund, sort of multi-strategy hedge funds, Many of them have delivered significant beta, whether it's equity beta or credit beta, and that is not something we want to pay for.”
Future Fund: Tail-risk hedges make up roughly 20% of hedge fund book
“So we have a couple of hedge fund strategies that really are sort of volatility traders or tail protection type mandates. And if we had diversified hedge fund portfolio, and if the person running that or the team running that were incentivized just based on th…”
Arndt: Future Fund holds almost no physical bonds due to low yields
“We hold almost no physical bonds. We don't have any concept of liability matching. We've only got a return target, and bonds aren't paying all that well at the moment, so there doesn't seem to be a strong reason to hold them, but we do have some rates exposure…”
Future Fund Added Gold in 2020 to Hedge Populist Currency Debasement
“In 2020 we put gold into the portfolio for the first time because we saw that more populist governments would be more likely to print money or otherwise debase their currencies because that's what governments always do when they're in those sort of situations,…”
Arndt: Static 'Set and Forget' Portfolio Allocation Is Dead
“And so really, in saying the death of traditional portfolio construction, and my team made me put a question mark on the end of the title, because we're really calling for a debate, but I guess I personally think it is. What we're really saying is there might …”
Arndt: Future Macro Regime Demands Less Reliance on Equities and Bonds
“When we look at the world going forward, we see more inflation, more volatility, probably wars, at least in localized places more frequently, deglobalization, more populist governments that will direct capital, all those things detract from economic growth, al…”
Arndt: Diversification Requires Granular Scenario Modeling, Not Asset-Class Labels
“I don't use the word diversification because we don't assume asset classes behave differently in a particular way. We try to look through that in a more granular way to say, well, these subsets, let's say, of real estate in these geographies will behave this w…”
Arndt: There Is Not Enough Global Skill to Allocate $45B to Alpha
“Today the equity book is maybe forty-five billion dollars, and we're just not going to find enough skill out there in the world to invest forty-five billion dollars”
Future Fund Holds Almost No Physical Bonds Due to Low Yields
“We hold almost no physical bonds. We don't have any concept of liability matching. We've only got a return target, and bonds aren't paying all that well at the moment, so there doesn't seem to be a Strong reason to hold them, but we do have some rates exposure…”
Future Fund Migrated Equity Alpha to Market-Neutral Hedge Funds
“Mainly our alpha program has now migrated to long short market neutral hedge funds, because we can pick Managers with pure skill, and it's very evident if they have it or not very quickly.”
Arndt: Aggregating 20 active equity mandates entirely cancelled out to pure beta
“When we aggregated up all of the maybe 20 or so mandates we had across that portfolio, by and large they cancelled each other out at the whole portfolio level, and I would have expected we would end up with something like beta less fees. Now, actually, as I sa…”
Arndt: Fund-wide fee caps risk cutting out hedge funds, PE, and VC
“Some of our local peers here in superannuation who have to compete for members have decided to go down a road of setting a fee budget for the whole fund. And then reporting those fees as a competitive advantage in their marketing. And we think that risks cutti…”
Future Fund acquired $1B direct stakes in Melbourne and Perth airports
“There was an opportunity in Australia to buy some domestic airports from a listed company, and we wanted to use a manager, but when we started talking to the market, we found that they weren't aligned sufficiently... So we actually went out, surprised the mark…”
Arndt: Venture capital outperformance is exceptionally persistent compared to other asset classes
“Firstly, our research showed that unlike almost any other asset class, the strongly performing managers tend to be persistent. And I think that's probably due to the fact that the entrepreneurs are attracted to the people who backed the last successful deals a…”
Arndt: Institutional portfolios rely on flawed, backward-looking CAPM assumptions
“Most funds, I would say, they're quite backward looking in their portfolio construction. What I mean by that is they take their sort of CAPM theory and their main variance optimization, and they look at historic data, and they then optimize the portfolio using…”
Arndt: Regulated Utilities Are Risky Inflation Hedges Due to Social Contracts
“Certain types of real assets, particularly infrastructure assets, that can pass through inflation look quite attractive, but not, for example, regulated utilities, which you might in theory say should be, because there needs to be a social contract. If you're …”
Arndt: Traditional Diversification Yielded Significantly Negative Returns Over Three Years
“But if you look over the last three years, actually diversification has been significantly negative because obviously bonds and equities have been correlated in a bad way, but alpha has been really, really strong.”
Arndt: Passive Trophy Assets Will No Longer Reliably Reward Capital
“We don't think set and forget trophy assets are that exciting, because there's no reason to think that you'll just get rewarded for having capital, and so you need to have strategies that actually create something of worth that people want to pay for”
Future Fund Turned Over Half of Its $200B Portfolio in Three Years
“We manage about two hundred and sixty five billion Aussie across seven funds. The future fund, which is the higher risk fund, is a bit over 200, and we've changed half of it in the last three years.”
Arndt: Sustained Inflation Will Arrive in Recurring Cyclical Waves
“There's many, many reasons why we think inflation will be sustained. It doesn't mean it will stay double digits or high single digits. It will come back down, then it will go up again, then it will come back down, then it will go up again.”
Future Fund Generated 2.5% Annual Excess Returns Over 18 Years
“When we break down the returns over the life of the fund, 18 years now, we've added about two and a half percent per annum, which we think is pretty good, and it's actually split, interestingly, only about a half a percent to diversification in the traditional…”
Arndt: Most Funds Rely on Flawed, Backward-Looking Portfolio Construction
“Most funds, I would say, I might not like to think of it this way, but I would say they're quite backward looking in their portfolio construction. What I mean by that is they take this sort of cap M theory and their main variance optimization, and they look at…”
Future Fund Never Re-Underwrites Co-Investments, Focusing Strictly on Manager Alignment
“We don't try to re underwrite the deal. We've already underwritten this manager. We've already backed them and we trust them. So our due diligence process will be focused on, is it in their skill set? Firstly, secondly, Is there alignment with the manager? Are…”
Future Fund Manages Zero Assets Internally, Relying on 120 External Managers
“We actually don't manage any assets internally. So we use managers for all of our implementation, and we've probably got about a 120 or so managers on the books at the moment, and would like it not to grow too much more than that, just so that we have the band…”
Future Fund Shifted Equity Alpha Pursuit to Market-Neutral Hedge Funds
“Mainly our alpha program has now migrated to long short market neutral hedge funds, because we can pick managers with pure skill, and it's very evident if they have it or not very quickly. We're only paying for the alpha, but secondly, they have very concentra…”
Future Fund Allocates 20% of Hedge Fund Book to Tail Protection
“So we have a couple of hedge fund strategies that really are sort of volatility traders or tail protection type mandates. And if we had diversified hedge fund portfolio, and if the person running that or the team running that were incentivized just based on th…”
Arndt: Future Fund Halted Equity Investing in 2007 on Negative Risk Premia
“And David Neal, when he was hired as CIO and the person who was in the head of strategy role at the time, Tony Day, came on board before I joined. And the very first thing they did was look at markets and say, we're not sure what's going on, but we think the e…”
Future Fund manages risk using a three-year cumulative drawdown to protect taxpayers
“We think about risk in terms of the cumulative drawdown over a three year rolling period, because we think as a public fund, we've got a responsibility to the public and to the taxpayer, and the tolerance for bigger drawdowns over longer timeframes could be te…”
Arndt: Future Fund GFC Credit Allocations Returned Above 20%
“It was probably about 15 to 20% of the portfolio into credit over about three months. So it was quite a big decision, and clearly that decision paid off very well. Those initial investments returned above 20%.”
Arndt: New funds must build back office before hiring investment staff
“Very wisely made the decision that it was better to build the back office and the custody system and the legal approach first before you start hiring investment people, because, believe it or not, investment people want to start investing straight away.”
Future Fund holds over 15% in cash to preserve flexibility
“And so that's why you see us sitting with sort of a bit over 15% in cash, and why we manage our illiquid asset pool carefully, because while you would hope you get an illiquidity premium from those assets, it also means your portfolio isn't as flexible as it m…”
Future Fund's $2B venture portfolio generated over 20% net across 10 years
“And we've done about 30 or so of them, as I said, and that portfolio has delivered You know, really strong over 20% net returns over 10 years now, which is very satisfying considering what's been happening in the world.”
Arndt: 50-year macro drivers like debt cycles and demographics won't continue
“There's a whole lot of things over the last 50 to 80 years, a huge leveraging cycle, a huge demographic boom post-war, that have meant that certain things behaved the way they did, that I just don't think are likely to continue. So I think we have to go back t…”
Future Fund trials pre-canvassing IC votes to reduce dominant-voice bias
“So we've transitioned to a model now for some of our committees, and it's in trial where we canvas views the day before the meeting. Whether people are inclined to vote for or against something, and why, and then the chair of the meeting gets that information.”
Future Fund manages portfolio with 60 investors co-located in Melbourne
“We try to bring those things together by having a small team of 60 investors all in one office here in Melbourne, Australia. And we can all sit in a room and debate things frequently, and we do.”
Future Fund holds significant onshore Chinese exposure in private equity
“So we've been playing them A little bit in the equity market we're working on some further strategies there, but significantly in our private equity program, where we have quite a bit of onshore Chinese exposure, really playing those themes.”
Future Fund Designs Bespoke Mandates Rather Than Buying Off-The-Shelf Strategies
“And rather than buying the vanilla strategy, we typically would design a strategy that suits us. And then if they have one that we can buy off the shelf, that's great. And if not, we can talk to them about building a specific strategy for us.”
Future Fund held 80% of its portfolio in cash when Lehman collapsed
“Fortuitously, and through some good decisions made by the people who were here before me, we were sitting with about 80% in cash when layman's went broke.”
Arndt: Future Fund Quantitative Bonuses Are Solely Based on Total-Fund Three-Year Returns
“But the quantitative performance measure, and the more senior you are, the more important that is, is solely based on the rolling three year whole of fund performance in an absolute sense.”
Future Fund Added Rare Earths and Metals to Hedge Stagflation
“We think commodities are one of the few things that have worked through stagflationary periods and inflationary periods, and we see no reason to think the future will be different, but you've got an added tailwind now that in the decarbonized economy, a lot of…”
Future Fund Quintupled Tech Team to Build Custom Data Capabilities
“And we just couldn't buy it off the shelf, what we wanted. So our technology team, I think, quintupled over the period of four or five years.”
Arndt: Asset Owners Learn Best From Peers, Not Flattering Fund Managers
“Fortunately or otherwise, when you're an asset owner, most people you speak to either work for you, and so it's always hard to know if they're really telling you what they think, or want a mandate off you. And so usually they agree with you wholeheartedly. I'm…”
Arndt: Credit Looks Attractive Following Broad Market Repricing
“Credit actually looks pretty attractive because it has repriced.”
Arndt: Millennials and Gen Z Expect Different Policy Due to Scarring
“People who are, say, under 45 today, millennial and Gen Z, really have a very different lived experience, partly because of how old they were when the financial crisis happened, and what sort of jobs they got, what that felt like for them, whether they could a…”
Arndt: Post-COVID Stimulus Forced Future Fund to Overhaul Portfolio
“So when COVID happened and government started to stimulate, we sort of got really interested in whether the world was changing, and I felt like we had to reposition not just the portfolio, but the mindset of the organisation around the world being different no…”