“So we have less exposure to market risk than many and perhaps more exposure to skills that can add value,” he said. “We are working the portfolio very, very hard to find returns that come at lower market risk exposure and it’s as simple as that.”
The fund has returned 9.7 per cent annualised over 10 years, tracking well ahead of the fund’s benchmark target return.
The Future Fund’s performance relative to superannuation funds has become a political issue amid suggestions from the government that the sovereign wealth fund should manage a superannuation option, a push rejected by parts of the industry.
In a slide presentation, the Future Fund demonstrated that on a tax-adjusted basis, it had performed better than top-quartile super funds in all categories, with materially lower volatility.
The median growth fund returned 0.8 per cent for the year, according to research house Chant West.
Of the funds with a 61 per cent to 80 per cent allocation to growth assets – the funds in which most Australians would be invested – QSuper came top with an annual return of 2.8 per cent.
The super returns generated in 2018 were the lowest since 2011, but the median growth fund has notched up seven years of consecutive positive returns, averaging almost 9 per cent a year.
The biggest test last year came in the December quarter when Australian shares dropped 8.5 per cent and international shares slumped almost 13.5 per cent.
Volatility in the final quarter of 2018 led to a $1.8 billion decline in the Future Fund’s assets from $148.8 billion to $147 billion.
The Future Fund’s exposure to listed equities, which stands at 30 per cent, declined by $4 billion for the quarter, as equity markets sold off. The value of the fund’s positions in illiquid assets increased by $3.3 billion, to $61 billion. That included a $1.7 billion increase in exposure to debt securities.
Mr Costello said that he believes there is quite a bit of risk left in investment markets, although he commented the Future Fund is well positioned to meet those challenges with its portfolio positioning. “Our portfolio should outperform in periods of downturn,” Mr Costello said.
He listed some of the risks facing investors who have already grappled with a substantial decline in equity markets over the final quarter of 2018. The slowing property market in Australia is one, tighter monetary policy in the US is another, as are trade tensions between the US and China.
“The residential property market has definitely turned down in Australia’s two largest cities – Sydney and Melbourne,” Mr Costello commented. “It turned down last year and it looks as if it is continuing to turn down. That has a wealth effect.”
Mr Costello linked the slowing property market in Australia to downward revisions for economic growth. “Forecasters are revising down their economist growth forecasts and I think that’s one of the reasons for doing that,” he said.
“We see some increase in the downside risks,” Mr Costello said. “I just think that the dial has moved a little more to the risk side.”