Why Australia’s $163bn investor just stashed billions in cash

Anastasia Santoreneos
·3-min read
Paper currency. Australian money.
Paper currency. Australian money.

While the Australian share market is hovering back around the 6,200-point mark, Australia’s sovereign wealth fund isn’t convinced the economy has recovered from Covid-19, shifting billions of dollars out of stocks and into cash.

The Future Fund revealed in its portfolio update that it grew 1.1 per cent in the September quarter to $163 billion, but performance still remains 1.8 per cent down on the previous year due to the Covid impact on the March quarter.

But while global and local markets are showing signs of recovery, the Future Fund shifted 0.3 per cent of its assets out of Australian shares and 2.3 per cent out of global shares.

Instead, it’s increased its cash holdings across the quarter from 17 per cent to 19.1 per cent. In dollar terms, that’s around $3 billion more, to a total cash holding of $31.1 billion.

This time last year, the Future Fund had 11.4 per cent of its portfolio, or $19 billion, allocated to cash, so it’s a hefty increase. Cash is now the largest asset allocation the fund has.

What is the Future Fund?

The Future Fund is a sovereign wealth fund created back in 2006 by the Commonwealth. It operates independently of the Government, and was originally designed to fund public servants’ superannuation.

“It’s got a mandate to invest its money in different places,” independent economist Stephen Koukoulas told Yahoo Finance.

“It invests quite differently to a conventional fund manager – it has a lot of money in unlisted investments and alternative assets.”

They also have a large allocation to international assets: “They’ve got more than the average Australian super fund would, by a long way. They have a very strong bias towards overseas assets,” Koukoulas said.

Over the September quarter, the Fund returned 1.1 per cent – significantly lower than the average growth super fund.

Data from Chant West shows the average Australian growth super fund returned 2 per cent, while the average balanced fund returned 1.7 per cent.

Why has the Future Fund shifted money from stocks to cash?

While you will receive a lower return if you invest in cash over shares, there’s virtually no risks involved.

“Obviously you get almost no interest rate on it, by definition, but you don’t put any of that capital at risk,” Koukoulas said.

This sentiment was echoed by Future Fund’s chief executive officer, Raphael Arndt.

“For now, we remain cautious given that we are yet to see the full economic effect of the Covid-19 induced economic shutdowns around the world and the potential for ongoing fiscal stimulus remains unclear,” Arndt said.

“Our purpose has never been more important than it is today. The value we add to the funds we manage will strengthen the Commonwealth’s long-term financial position, support medical research, assist Indigenous Australians, support drought resilience and communities impacted by natural disaster and help fund Australia’s National Disability Insurance Scheme.”

So the Fund’s move makes sense, Koukoulas said.

“That’s understandable,” he said. “Shares have been volatile this year, and some of these alternative asset classes are a little unsure too, so it’s just a decision – they are making a judgment call.”

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