Fund boss Raphael Arndt says the investment community is wrong to hope the tools it has used for decades will work in a dangerous new economic world.
Raphael Arndt, the chief executive and chief investment officer of Australia’s $200 billion Future Fund, wants to deliver a blunt warning to Australian investors and the financial community that exists to serve them.Future Fund chief executive Raphael Arndt is well prepared for an inflationary environment.that sets out how the Future Fund believes the economic and market environment is changing, and how the sovereign wealth fund is restructuring its portfolio in response.
, but it will have some nasty twists, including climate change, demographic headwinds and high debt levels.Perhaps even more importantly, Arndt warns that many of the traditional tools that Australian investors have relied on to construct their portfolios – essentially lots of equities, with bonds and currencies for defence – are unlikely to work.“My key message is that it’s time for people to act on this,” Arndt says. “I really want to start a conversation.
Geopolitical tensions – most obviously in Russia – have meant a further deceleration in globalisation and an increase in concerns around the security and resilience of supply chains. These problems have been compounded by extreme weather events and other effects of climate change, which have underscored the need for an urgent but very expensive energy transition.
For example, debt levels are much, much higher than they were in the 1970s and the ageing population provides a demographic headwind. Climate change is a huge concern today, while the Cold War of the 1970s has been replaced with the threat of hot wars.Many of these trends have been building for some time. But what’s surprised Arndt and his colleagues is how they have accelerated.
There are several key ways it adjusted its portfolio, starting by increasing the level of risk in the portfolio by 5 per cent, with what the Future Fund calls its equivalent equity exposure rising from 55 per cent to 60 per cent.“We didn’t like that, but we’ve got a mandate to hit,” Arndt says. “We can’t predict exactly what will happen, but we know that our portfolio has to be different to succeed in that world.
The macro hedge funds the Future Fund invests in made a killing going short rates and long inflation in the year to June 30, delivering returns of 20 per cent when equity markets were off 15 per cent and bond markets off 40 per cent, and Arndt remains confident they can continue to profit from changing market conditions.
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