The Ledger
Every statement that passed quotation and attribution checks. Mix any filter with any other: certainty 1/5, debate potential 5/5, or both at once.
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Arndt: Future Fund avoids large buyouts, viewing them as fee-eroded levered equities
“Our portfolio has no large buyout at all, because we think that large buyout is really just levered equities, typically. And if there's skill added on top, and there might be, then most of that goes away in fees. So we don't think it adds a lot for the portfol…”
Future Fund avoids brand-name PE managers that rely on leverage over operations
“Well, there's a lot of brand names we don't have, and it varies why, but one of the most significant reasons is because they just use leverage we found to juice up their returns, and we don't think that's attractive.”
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…”
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 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: Stock-Picking Skill in Equities Is Rapidly Arbitraged Away by Technology
“We don't think that skill is widely available in equity markets today. Technology means that it's being arbitraged away very quickly.”
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.”
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”
Arndt: Only 6% to 7% of venture capital managers return enough capital
“Venture managers don't return capital, and only six or seven percent return enough capital to justify their existence.”
Arndt: Chance of US recession over three years is quite high
“So, we think the chance of a recession in the US is quite high over, say, a three-year time horizon, and it doesn't appear that markets are currently pricing that in.”
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…”
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: 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…”
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…”
Arndt: Many Large Multi-Strategy Hedge Funds Merely Deliver Expensive 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, or other sort of momentum type exposure. And that is not something we want to pay for.”
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”
Arndt: Total-Fund Fee Caps Exclude Essential Private Equity and VC Investments
“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…”
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: Populist Politics Usually Drags on Growth and Drives Inflation
“Populist politics in general is usually detractive from economic growth and inflationary.”
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…”
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: LPs should not re-underwrite deals during co-investments
“We don't try to re-underwrite the deal. We've already underwritten this manager, we've already backed them, and we trust them.”
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: 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: Mega-funds internalizing asset management will force industry fee compression
“What's happening in infrastructure and properties, the big funds, rather than doing that, they're internalizing, as you pointed out, and that is creating pressure on the industry. And that will force change. And I think the same is true in equities and hedge f…”
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.”
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 …”
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: 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 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: 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: Institutional Macro Inaction Stems From Governance, Not Investment Talent
“Most of the things we think about the world are not secrets. Plenty of people are debating the same issues. It really boils down to, are you willing to act on that? And how far are you willing to move off the back of that? And mostly that's not the capability …”
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: 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…”
Arndt: Populist Politics Detracts From Economic Growth and Drives Inflation
“And then we're also looking at things like geopolitics trade disputes and things like that, which populist politics in general is usually detractive from economic growth and inflationary.”
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…”
Arndt: Stock-picking skill is scarce and rapidly arbitraged away by tech
“We don't think that skill is widely available in equity markets today. Technology means that it's being arbitraged away very quickly”
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…”
Arndt: Private Equity Leverage Adds LP Risk While Benefiting Managers
“Usually just using more debt gives the LPs more risk and more upside for the manager. But with a lot of downside risk”
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…”
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 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 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…”
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.”
Arndt: Future Fund co-investment returns match funds without adverse selection
“We've done probably 20 or 30 co-investments in private equity over the years, so it's not an enormous number, but it's enough to have a view. We also co-invest in the venture portfolio, and we've done about 40 there as well, and so I would say that, broadly sp…”