28 Apr

Future Fund’s David Neal says low rates hurting growth

Future Fund chief executive David Neal has warned that a prolonged period of ultra-low interest rates has reduced the probability of the fund achieving its long-term growth targets, while defending the fund’s big move into cash.

Mr Neal said the $117 billion sovereign wealth fund was not hiding under a blanket and still ran a “significantly risky” portfolio in an effort to meet its return target of the consumer price index plus 4.5 per cent.

He told a business lunch in Sydney yesterday the fund had moved into providing loans to small and medium businesses in Britain and to developing property that could later be sold as it looked to generate returns.

Cash has become the biggest single asset class in the fund at 23 per cent in the March quarter, ahead of international equities, amid concern at the fragility of the world economy and the worst start on record for US and Australian equities. Mr Neal said financial markets were being distorted by ultra-low and, in some cases, negative interest rates and that the fund’s big cash balance would allow the fund to take advantage of opportunities if the return ­outlook improved. “Our long-term return expectation is lower,’’ Mr Neal said on the sidelines of an Australian British Chamber of Commerce event in Sydney.

“We think we can still achieve it. The likelihood is lower, and probably lower than we would have liked, but we are still constructing a portfolio that we think will achieve the mandate over time.”

The Future Fund last week reported its first quarterly loss in four years, down 0.9 per cent in the three months to the end of March and up just 0.2 per cent for the first nine months of the financial year. The result ends a golden run of three years of double-digit returns, including a 15.4 per cent return in 2014-15.

The fund has almost doubled the $60.5bn it was given from budget surpluses since 2006 when it was established.

By Andrew White, Associate Editor, The Australian

The article can be found here

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