Is the Future Fund telling us something?
David James |
28 April 2015
The Future Fund, a sovereign wealth fund that is designed to pay the sueprannuation of public servants, has comfortably beaten its benchmark of a return of inflation plus 4.5%. But it is starting to sound a more bearish note.
The fund has a complex method for investing, whihc is nothing if not rigorous and well diversified. It had a 7.1 per cent return over the first three months of 2015 and 15.1 per cent for the financial year to date. Over the last year the fund has gained 19.9 per cent. It has $117 billion under management. But the AFR reports it is changing its allocations more to a defensive position:
"The Future Fund has increased its cash holdings to 15 per cent over the last quarter, signifying a growing sense of caution at Australia's sovereign wealth fund as it seeks safe haven at a time of record low interest rates and "overpriced" assets.
More than $17 billion, or 15.2 per cent of the fund's assets were held in low-returning cash at the end of the March quarter, up from $14 billion or 12.8 per cent at the end of the December quarter. Fund managers tend to move to cash to protect their investments from losses in the event of a downturn. But a macro-economic environment dominated by ultra-low rates and even negative yields in some parts of the world means that in this cycle, cash returns will be poor."
The move to put more in cash may be strategically defensible. But there is little doubt that in the current environment cash is generaly not a good place to be, because of low interest rates. Creating a diversified mix of shares, bonds, property and cash would seem to be as necessary as ever. Even the Reserve Bank governor Glenn Stevens is making this point:
"Just about everywhere in the world the price of buying a given annual flow of future income has gone up a lot," he said.
"Those seeking to make that purchase now – that is, those on the brink of leaving the workforce – are in a much worse position than those who made it a decade ago.
"They have to accept a lot more risk to generate the expected flow of future income they want."
The chairman of retirement income at Challenger, Jeremy Cooper, notes that even retirees with $1 million would, if they relied only on cash or annuities, struggle to earn the equivalent of the aged pension:
"The brutal reality is that a fair price for an age pension in today's interest rate environment is around $1 million," he said, estimating that would produce for a couple an income of around $33,717 of income a year. "A comfortable retirement would cost more."
Pursuing yield creates dangers for those who are older, and therefore have a lower tolerance for risk. It is the false promise of high yields and low risk that leads to the kind of disaster seen with Storm Financial. Common sense, as well as investment acuity, is required.