Future Fund focuses on building resilience

The Future Fund is focusing on building resilience to inflation across its investment portfolio.

In a newly released position paper, which is to be the first of several on aspects of resilience, the Fund’s investment team says this focus has helped it recognise and address inflation as a key portfolio vulnerability.

Future papers will explore other topics around portfolio resilience including artificial intelligence (AI) and technology, currency risk and the energy transition.

The new paper builds on previous position papers starting with A New Investment Order, released in 2021. That paper set down events and paradigm shifts which the Future Fund expected to impact on global economies, financial markets and investment portfolios; it envisaged a future very different to what investors had expected over the prior 30-40 years. This included, more conflict; more intervention; more divergence; more drivers of change; more volatility and fragility and more uncertainty, predictions which are largely proving accurate.

The 2022 paper, The Death of Traditional Portfolio Construction? put forward the view that planning for future returns would be more difficult in this more complex environment and suggested changes in the fund’s investment approach.

Then last year, Geopolitics: The Bedrock of the New Investment Order homed in on geopolitics as an unpredictable but significant force that would impact investment portfolios for years to come.

Now the Future Fund is seeking to build portfolio resilience by moving toward a selection of exposures that it believes will be capable of achieving its target returns through a wide range of future scenarios.

The intention is that this structure will enable the fund to adapt to, and quickly transform from, negative shocks while also being able to generate mandate-achieving returns in positive scenarios. This will reflect a more quantitative finance definition, particularly in measuring success through stress testing and scenario analysis which the fund’s investment team sees as a key part of its investment process.

Under its refreshed approach, the Future Fund will develop multiple narratives on world situations in three and ten-years’ time, estimating capital market outcomes under a variety of cyclical and secular scenarios. The use of these scenarios, the fund says, is not about predicting but about preparing, and proper preparation will achieve portfolio resilience.

Image: The Future Fund chief executive Dr Raphael Arndt.