For second year in a row, the Future Fund is the only State-Owned Investor to achieve a perfect score (25 of 25 elements) in our GSR Scoreboard. The Australian investor has performed well in both rising and falling markets for the past 15 years, while pursuing excellence in transparency, responsible investing, and resilience. We had the immense pleasure of discussing the results of the new assessment with Will Hetherton, the fund’s employee number 5 and current Head of Corporate Affairs.

[GSWF] Future Fund’s size has tripled, from an AU$ 60.5 billion initial injection to today’s AU$ 178.6 billion, in only 15 years. How did you guys do that and what would you say your main success factors are?

[FF] We were blessed with starting with excellent clarity of purpose and statutory framework: very clear return and risk parameters that have allowed us to establish the independence of the organization. Building up a clear investment governance and a strong culture has also been crucial and brought us together as a team. Additionally, we continue to think about how the world is changing and how we need to evolve accordingly: we must not rest on our past performance but look at how things are changing and how we need to evolve towards that.

[GSWF] Future Fund’s asset allocation seems to have stabilized at around 43% of alternatives (RE, Infra, PE and HF), which is high among global savings funds; do you see this changing in the near future?

[FF] Every fund is different and has to run its own race – for example, we like Australian infrastructure given the way it links to our CPI-based mandate, and we believe venture capital is an important tool to access innovation and companies of the future. High returns are getting harder to achieve and alternatives provide us with the opportunities we need to create value. We are also trying to be more granular and to focus on specific themes within each asset class.

[GSWF] We understand that most of your portfolio is invested by external managers, who have consistently outperformed your target returns – do you expect to internalize any of the asset management?

[FF] We operate a hybrid model and our legislation requires us to use external asset managers, which we see not as a restriction but as a potential advantage. We work very closely with our partners to create opportunities, we tap into them for macroeconomic perspectives and insights into particular markets, which we can then act on. Partnering with external managers allow us to focus on the bigger, portfolio-wide issues rather than becoming overly distracted by the nuts and bolts of particular investments. This works for us and we will  continue to operate with this hybrid model.

[GSWF] Your structure is fairly slim with less than 200 employees, all based out of Melbourne, with what we assume is a very low churn rate – would you expect to open any office overseas in the future?

[FF] We expect to grow from 200 towards 350 staff in the next while, partly shifting from using contractors to bringing those roles in house and partly to adapt to the investment environment we see ahead This growth is a result of our business strategy and intent to sustain the success we have had into the future. We do have an office in Sydney but are wary of expanding further afield largely because of the risks to culture, which is a key building block for our organization.

[GSWF] Let’s now look at the three different aspects of the GSR Scoreboard in your organization:

Governance (“G”):

[GSWF] The Future Fund Management Agency invests six different pools with very different risk profiles, asset allocations and target returns – how do you ensure independence and balance of all funds?

[FF] Within those six funds, three have the same risk-return mandate, but it has indeed been a challenge to think through how to allocate opportunities and how to manage governance and equity across the different funds. On the flip side, scale is an advantage and combining these pools of capital allow us to access opportunities they could not otherwise access individually.

[GSWF] Future Fund has co-invested with several funds including CIC and OMERS (Port of Melbourne) and ADIA, CalPERS and NPS (Gatwick Airport) – what is your take on global strategic relations?

[FF] We really value our relationship with our peers and Covid-19 has been a challenge for the lack of travel. The value we get is  less on co-investments and more on broader insights on governance, macro issues, risk management, etc.

Sustainability (“S”):

[GSWF] While Future Fund is a founding member of the IFSWF, it seems to have shied away from public initiatives (e.g., OPSWF, PRI, NZAOA) when it comes to Sustainability. What is the rationale behind this?

[FF] ESG and Sustainability are important issues to us, and we recognize they can have an impact on performance. We aim at collaborating regardless of membership and we are always cautious on what we can fully commit into and add value to. We are still very active in ESG issues, e.g., in the recent prominent issue of Rio Tinto, which caused a destruction of indigenous heritage in W. Australia, we took a view and articulated our expectations to the company very clearly.

[GSWF] Your exclusion list seems to focus on tobacco and military weapons companies so far. Do you expect it to include other ESG issues such as coal-based energy and human rights in the future?

[FF] We have a clear framework based on our legislation and investment strategy and Australia’s treaties that drives our exclusion list. We value diversification and while we do have exclusions our focus is on engagement and on integrating ESG risks into our investment decisions.

Resilience (“R”):

[GSWF] We understand that the first withdrawal from the Government, expected to happen in July 2020, was pushed to at least 2027 (despite Covid-19); when is the fund expected to reach its peak in terms of AuM?

[FF] That will depend on a range of factors, but we expect the Future Fund to continue to grow for years to come.  Importantly, what this does is  allow the Fund to continue to do what it was set up to do, i.e., to strengthen Australia’s balance sheet and long-term financial position.

[GSWF] As employee #5, you have seen a lot in the past 15 years. What do you expect to see in the next 15?

[FF] The organization today is different to what it was 15 years ago but at its core it has the same purpose and culture. We had a blank sheet of paper and we have done the best we could to take advantage of that great starting position. We are implementing a new three-year business strategy that will shape our future and that focuses on four distinct elements:

1.  Refreshing our investment model, to respond to the shifts we have seen in the investment  environment;

2.  Maturing the organization, building resilience and efficiency as we continue to grow;

3.  Preserving our legacy, taking the best of our culture and evolve that for the future; and

4.  Expanding our voice and building our networks in order to firm up our position with stakeholders and as a global institutional investor.

I think those areas will really help shape what we look like in a decade or so.

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