Australia’s $142 Billion Wealth Fund to Curb Global Investment

(Bloomberg) -- Australia's A$201 billion ($142 billion) sovereign wealth fund plans to seek more local investments and trim exposure to listed companies as geopolitical tensions rise and markets get jittery over rate hikes.

The Future Fund is seeking more illiquid assets and plans to use more active strategies to generate returns in expectation that rising borrowing costs will eventually tip economies into recession, said Chief Executive Raphael Arndt. Continued higher inflation will also pose a problem for investors, he said.

“The days of being able to earn returns just by taking risk in markets are ending,” Arndt said in a Bloomberg Television interview on the sidelines of the Milken Institute Global Conference in Los Angeles. “We need to get a lot more creative.”

Australia Wealth Fund Posts Biggest Quarterly Loss in Two Years

The Future Fund suffered its largest quarterly loss in two years in the three months through March after warning of a worsening global outlook for some time. Arndt on Wednesday said the world is in a period that closely resembles the 1930s with populism becoming entrenched and countries taking more supply chains onshore during the pandemic.

“That means probably a bigger focus on more domestic exposure than what we've had in the past,” Arndt said. “We don't take the free flow of capital around the world for granted anymore.”

The rise of geopolitical tensions has seen the fund reduce its emerging market exposure amid expected drags on economic growth. It's also exercising “a lot more” caution on China, he said, adding that it's possible -- though not yet likely -- that the West will seek sanctions on its economy if the nation ramped up its support for Russia.

“The world has totally changed and all our financial models, all the things we learned in business school, around modern portfolio theory and capital asset pricing models -- they're all based on observations of the world since World War II and they're wrong,” said Arndt. “And so now we need to have a new way of thinking.”