“We’re not pricing on a daily basis. People are not coming in and coming out like they are in superannuation, so there’s no need to have a daily strike price,” he says.
Anyone can play the so-called “illiquidity premium” game. It just helps to have the appellation of sovereign wealth fund when it comes to judging the winners and losers.
But come June 30, those marks will have to be taken.
There wasn’t any hint of panic as Mr Costello and chief investment officer Raphael Arndt ran through the portfolio and a very rough approximation of the bottom line impact from the quantum of marks taken by other funds.
The Future Fund reported a 3.4 per cent fall in its value to $162 billion by the end of the March quarter. That’s impressive given the 20 per cent slump in major market indices.
The fund’s return in the financial year to date is negative 0.2 per cent. Including a 7.5 per cent fall in private market valuations would have lowered that to negative 3.5 per cent.
That’s a flesh wound compared with its long-term track record. Over the past decade, the fund has generated an annual return of 9.2 per cent.
It also stands out relative to the performance of other sovereign wealth funds.
Norway’s Norges Bank Investment Management, the world’s largest sovereign wealth fund with around $US1 trillion under management, delivered a return of negative 14.6 per cent in the March quarter.
The solid performance in the March quarter comes from the Future Fund’s anticipation of a downturn for many years – and preparing for it.
The fund has sold 30 individual illiquid positions – such as Southern Water in the UK – over the past five years. It has also sold about $4 billion of private equity exposure over the past 12 months.
Private equity is a focus in the discussion around the value of unlisted investments. At $29 billion, or 18.2 per cent of the portfolio, that’s understandable. It’s the biggest exposure behind 19 per cent allocated to developed market equities.
While Mr Arndt cited the weak Australian dollar for the rise in the value of its private equity holdings, from $23.8 billion at the same time last year, the asset class had “performed very well” and outperformed the rest of the portfolio, thus becoming relatively bigger.
Its exposure to more venture capital and growth-focused investing, rather than leveraged buybacks, also paid off. Investments in video-conferencing, software and gaming were doing “exceptionally well”.
Another of the Future Fund’s unlisted exposures comes through its near 10 per cent weighting in debt.
While the debt portfolio of $15.7 billion is around 50 per cent of the size it used to be, about 50 per cent is in products such as private credit and structured credit that will come under the microscope come June 30.
But balanced against that is $15.6 billion of cash, underscoring the need for financial flexibility if capital is going to be deployed into illiquid and unlisted assets in the search of higher returns.
Mr Costello summed it up best: “You can’t do one without the other.”
Wise words for those in superannuation land.