Future Fund warns markets ‘under-pricing’ risk

afr.com:

Australia’s sovereign wealth fund has posted a 6 per cent return for the year to June 30 as it increased its exposure to local and global equities.

The Future Fund now manages $206.1 billion, and while its returns this year were below its 10 per cent target, it remains well ahead of its three-, five- and 10-year target, with a 7.7 per cent annual average return since inception.

Peter Costello is the chairman of the Future Fund; Raphael Arndt is the chief executive. Arsineh Houspian and Eamon Gallagher

“Share markets were surprisingly strong through the second half of the financial year as they appeared to be pricing in a ‘Goldilocks’ scenario,” Future Fund chairman Peter Costello said in a statement. “Whilst this would be a welcome outcome, we see risks on the downside.”

But Mr Costello, the former federal treasurer who established the fund, said new challenges have emerged for long-term drivers of growth, with inflation remaining elevated – although there were signs it might have peaked.

“Data shows wage and price pressures that contribute to inflation remain strong, leaving open the possibility that inflation will continue and the path to lower interest rates remains a way off,” he said.

“We are yet to see the full impact of higher rates work their way through developed economies and continue to see the risk of a recession in developed economies as central banks remain vigilant in bringing inflation down.”

The 6 per cent return compares the median return of balanced superannuation funds of 9.1 per cent, although direct comparisons are complicated by tax and liquidity issues.

Raphael Arndt, the Future Fund’s chief executive, said the favourable conditions that “drove markets in recent decades have been undergoing