Future Fund doubles emerging market exposure

The Australian SWF sees an interesting opportunity in less developed markets, though its overall private debt allocation has fallen.

Future Fund, the Australian sovereign wealth fund, has increased its debt securities exposure while its allocation to private debt has seen a slight decrease, according to its latest 2015/2016 annual report.

As of June 2016, investment in debt securities accounted for 12 percent of its overall portfolio, a slight increase compared with the 9.8 percent allocation last year.

Although the allocation to private debt decreased from 36 percent to 30 percent, it remains the biggest portion of the debt portfolio.

The SWF says it continues to believe that private lending and structured credit provide a strong and stable base for income in the current volatile environment and can help to buffer the mark-to-market pressure seen in more liquid sectors.

A key area of portfolio growth was in the emerging markets debt sub-sector, which has doubled from four percent last year to eight percent this year.

“Asset pricing has adjusted, with emerging markets’ debt having under-performed other credit sectors for the last few years and more recently appearing to offer an interesting entry point. This has built confidence to increase exposure, targeting both sovereign and corporate issuers,” the fund said in its report.

In addition, the negative impacts from the strength of the US dollar and falling commodity prices are easing off. Coupled with proactive fiscal and economic adjustments, emerging markets are starting to stabilise.

Another major change is the fund’s increased commitment to Australia from one percent last year to four percent this year caused by the growing regulatory pressures felt by traditional participants such as banks and insurance companies.

“During the year we invested with a manager who is targeting lending opportunities which may arise from these changes. This is similar to established programs within Europe and North America which remain a significant exposure in the portfolio,” it said.

In general, the expected return is declining in the current investing environment. At the same time, underlying economic and financial risks are increasing, making the prospective reward for taking risk less attractive.

The performance of the debt portfolio was not isolated from this environment but the overall size of the debt portfolio has been largely unchanged over the past two years. The SWF retains a substantial exposure to more liquid credit markets, predominantly invested in corporate loans, sub-investment grade bonds, and structured credit markets. It continues to see realisations from its prior vintage of distressed debt investments and is ready to take advantage of a broader credit default cycle should one arise.

Total assets managed by the Future Fund are valued at around A$140 billion ($106 billion; €97 billion).