Australia’s $130bn wealth fund bets inflation to persist

Bloomberg

Australia’s sovereign wealth fund is positioning for inflationary pressures to persist around the world, betting that gold and other commodities will offset crimped returns across asset classes.
Future Fund Chief Executive Officer Raphael Arndt said “a few percent” of the firm’s A$193 billion ($130 billion) of assets is now
invested in gold, after making its first foray into the broader commodities sphere this year. Rising interest rates to combat inflation, combined with war and de-globalisation, are working to undermine a conventional 60-40 portfolio split of stocks and bonds, he said.
“We want to look for inflation protection,” Arndt said in an interview Friday. “We have started buying commodities, gold — for the first time ever — diversifying our exposures.”
With the plunge in global equities and bonds this year, many investment firms are grappling with ways to cushion their funds. Arndt expects heightened geopolitical tension and de-globalisation to spur stickier inflation, requiring central banks to keep interest rates at restrictive levels. This lifts the risk of stagflation, weakens equity returns and will diminish the defensive role played by bonds, he said.
“It’s not sensible to keep that same approach to portfolio construction,” Arndt said, referring to the 60-40 notion. The firm detailed its approach in a research paper.
Instead, the fund is targeting assets that protect against rising prices, such as commodities and real assets, as well as venture capital, private equity and hedge funds. Meantime, the firm last week finalised a deal to take a 3% stake in Sydney Airport, Arndt said.
Arndt said the fund was looking at “very targeted” real estate and infrastructure deals and that the Sydney Airport equity stake would complement its existing holding of Telstra InfraCo Towers, a mobile phone
infrastructure network.
The fund has also established a function to manage liquidity in the portfolio as the chance of another destabilising event, like the UK’s gilt market crisis in September, remains present due to continued changes in rates.