Speaking on a recent podcast hosted by Bridgewater Associates, Ben Samild, Future Fund’s chief investment officer, detailed the fund’s approach to a more inflationary environment, altered growth dynamics and varying levels of risk associated with different countries.
Samild explained that not only did the sovereign wealth fund make changes to its portfolio worth around $100 billion between 2020 and today, but it also significantly changed its duration exposure and took more of risks.
“We put a higher price on our liquidity and flexibility, we did opportunistic things, marginal changes in our sector strategies to prioritize different characteristics of the assets we were buying or selling,” Samild said.
“And we think all of this – we know all of this – has led to better performance. We think, more importantly, it has led to a more resilient portfolio, as you pointed out, in the face of multiple potential environments.
Referring to the new world that has emerged after 40 years of an era defined by a “unipolar, dominant hegemonic and laissez-faire” environment with “ever increasing integration”, Samild said the fund had to adapt to change as ” Everyone is shouting that the world is ending.”
“We had a very strong feeling that this world had reached — that this rubber band had been pulled as far as it was going to be pulled, and that it was going to start going back the other way,” he said.
“The evolution of the geopolitical environment, which was going to lead to a change in domestic policy, environmental change priorities, and these are all deglobalization, relocation/friendshoring, strategic competition, demographics, industrial policies competing, more dirigiste governance – you know, all these things that have played out a bit and now you can no longer open your first page of Bloomberg screen without being drowned in all that.
“These are things that we identified as important, I guess, as agents of change in 2020 from what we considered then to be a secular horizon, and we still do. »
Explaining how the Future Fund protects its portfolios from inflation, Samild said “there is no magic contract you can buy” that offers protection.
“Clearly you have to think about it across the whole portfolio and try to measure it across the whole portfolio – measure your vulnerability across the whole portfolio, which we do. We’re trying to understand almost like a concept of the duration of inflation and how that has changed over time,” he said.
“But it’s a really difficult question, isn’t it? Because whose inflation is it? Where is the inflation? What inflation? What inflation? How does it bubble?
Samild suggested that while some may view commodities as a hedge against inflation based on the experience of the 1970s, this strategy may not work if inflation is driven by massive fiscal expansion rather than by supply constraints.
“We’ve tried to think about what kind of inflation we’re concerned about, what we can do, what cost we’re willing to bear, what issues are there with events that ultimately lead to inflation,” he said. he declared. said.
“We’re not going to predict and we’re not going to manage the portfolio too specifically, but we just want to make sure we can survive it and, ideally, thrive on the other side.”
Samild added that although investors have become complacent in viewing inflation as a uniform global phenomenon, he now believes there is a need to be more cautious as Australian inflation could deviate significantly from inflation American, which would make the investment landscape even more difficult.
“The Australian inflation-linked bond market is de minimis, so I can’t just go out and buy these things. I can go and buy US inflation, but that may not fit my mandate,” he said.
Previously, former Future Fund vice president Alicia Gregory reported that the sovereign wealth fund was exploring alternative paths beyond the traditional portfolio of bonds and stocks, after realizing that structurally higher inflation could undermine the defensive nature of bonds.
“Investors may need to seek other forms of defense in this type of environment, perhaps through shorter duration of private credit, differentiated hedging or seeking assets with higher pass-through domestic inflation,” Gregory said at the Australian Wealth Management Summit. in Sidney.
The fund first warned of a changing environment in its June position paper, in which it said investors need to familiarize themselves with the complexities and potential implications of geopolitics, emphasizing its central role in shaping a new investment landscape that will have a profound impact on financial markets, macroeconomics. , and political decisions.
