New growth and maturity
By early 2009, governments around the world were unveiling huge stimulus programs aimed at spurring jobs and economic growth. It marked the beginning of a new era of asset price inflation that was to continue for more than a decade.
The Future Fund had to start extracting more from its portfolio. It switched more of its equities from passive to active management and began making bigger allocations to alternatives and high-quality unlisted assets.
Neal felt that many institutional investors arbitrarily filled pre-determined asset class buckets with too many average quality assets in the name of diversification. It was risk management at its worst.
“We had to make sure everything in the portfolio was brilliant, and if that meant we opened up with only one real estate investment because we would only find one brilliant real estate investment, that’s fine, we’ll have a very concentrated real estate portfolio,” Neal says.
The Fund didn’t need a balanced property portfolio or a diversified credit portfolio – it needed a well-diversified total portfolio (assuming those assets were of high enough quality to justify the diversification).
The beginning of the Future Fund was inextricably linked to the privatisation of one of the country’s iconic companies: Telstra.
Part of the sale proceeds topped up the Future Fund’s initial portfolio while the Government transferred its remaining 17% stake in the telco directly to the Future Fund after the T3 sale in early-2007.
This unique history never stopped the Fund from making independent investment decisions about the holding, including voting against resolutions at Telstra’s AGM in 2010.28
The Board always planned to sell down the shares, which heavily skewed its portfolio towards one Australian company (the Fund’s performance was initially reported excluding Telstra shares).
Investing for innovation
The Future Fund has built Australia’s largest venture capital program, counting successful investments in household names such as Canva, Uber, Airbnb and Snapchat.
The program provides significant potential growth as well as insights into the Fund’s holdings in established companies which may be disrupted in the future.
“A lot of people think about technology as an ‘industry vertical’ such as financials or consumer,” says the Future Fund’s Head of Private Equity, Alicia Gregory.
“We say that technology is now a ‘horizontal’ because it cuts across every industry. We are in the early stages of a long-term super-cycle where technology is disrupting the world and COVID has only accelerated that.”
A material proportion – over $5.5 billion – of the Fund’s $34 billion Private Equity portfolio is held in venture capital through some of the best managers in the world. While the Fund began by giving managers the freedom to find any investments, in recent years it also began co-investing alongside them.
“You lose control of not only information, but also your illiquidity when you outsource the lot. We’ve been on that evolution of crawl, walk, run – we’ve really got into that run stage in the last three years,” Gregory says.