Australia's Future Fund is moving away from riskier assets, in a sign that major institutional investors are becoming more conservative.
Australia's sovereign wealth fund declared on Monday that it made a 1.5% gain in the quarter through September, bringing total assets to A$124.7 billion ($95 billion).
"Like all investors across major global economies, we are facing a low-return environment," said the fund's chairman, Peter Costello, previously the treasurer of the Liberal Party. He said the fund is performing "well," but is taking a "disciplined and prudent approach" to new investment.
Australia's economy appears to be bulletproof -- it has gone a quarter-century without a recession, as I explained in September. But with growth slowing in China, and another major trading partner in the form of Japan struggling to generate any growth at all, the nation's exports, particularly in terms of mining and commodities, are not finding as many buyers as in the past.
The low-interest-rate environment is to blame for the shift to the defense, Costello said. The fund has lowered its growth target after posting a disappointing return of 4.8% in the last fiscal year, well short of its 5.5% target. By comparison, for the 2015 tax year, it gained 15.4%.
The main change in the fund's exposure is in its allocation to real estate. That now accounts for 6.5% of assets, down from 7% last quarter. The cash allocation has also risen from 21.7% to 22.1%.
However, the fund has stepped up its allocation to equities. Global and domestic stocks, combined, now make up 29.4% of the fund, up from 21.7% in June.
Funds such as the Future Fund find it hard to put their enormous assets to work. The fund's bid to do so got a major boost in September, when it won the bidding for the Port of Melbourne at a price of A$9.7 billion ($7.4 billion). It has partnered with China's sovereign wealth fund, the China Investment Corp. (CIC), as well as the Ontario Municipal Employees Retirement System from Canada in that effort.
CIC has backed Global Infrastructure Partners, one of the entities in the consortium, which has secured a 50-year lease for Australia's busiest port. The National Pension Service of Korea is another investor in GIP.
Australia's Foreign Investment Review Board must approve all large investments from overseas. That has created problems for international bidders for Australian assets. So it is significant that the government allowed an investment from China and Korea into infrastructure as significant as the port.
The Australian treasurer blocked a Chinese bid for S. Kidman & Co., a century-old cattle ranch that is Australia's largest landowner, on national security grounds. Mining magnate Gina Rhinehart, Australia's richest person, has teamed up with Shanghai CRED Real Estate Stock in a renewed bid of $294 million.
An all-Australian consortium withdrew its own offer last week. Aussie Treasurer Scott Morrison had welcomed the all-Aussie bid, saying it was "great that Australian interests are actually stepping up to the plate."
There has also been a crackdown on the purchase of individual homes by non-Australians. Overseas investors are only allowed to buy new property in Australia. So there have been high-profile cases such as the rejected purchase of a $31 million home in Sydney by the founder of Evergrande Real Estate (EGRNY) , Hui Ka-yan. He was forced, within 90 days, to sell the "secondhand" mansion he bought in the exclusive Piper Point neighborhood.
The Australian government does not appear to be as protectionist in its efforts to invest abroad. At the Future Fund, Costello said the fund would work with international partners to be "nimble and opportunistic" in its investments when an attractive opening presents itself.
The fund has averaged an annual return of 7.6% since its inception in 2006. That beats its self-appointed target of 6.9%.
