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Giant Wealth Fund Seeks Managers Who Can Beat Frothy Market

Matthew Burgess and Sarah Wells

(Bloomberg) -- Australia’s sovereign wealth fund has been saying for months that with markets as elevated as they are now, generating gains is only going to get harder. So is finding the right asset managers.

For the A$212 billion ($142 billion) Future Fund, picking investors is a higher-stakes decision given an outlook that implies market returns won’t be enough to meet its target. The problem: in public markets, manager skills are concentrating, meaning there are fewer funds beating their indexes after fees, Chief Investment Officer Raphael Arndt said. He also noted that the cash flooding into other asset classes, such as private equity, is taking up capacity with experienced hands.

“There is a fight for skill across the world,” Arndt said in an interview in Melbourne. “It’s harder and harder for someone like us to continue to get capacity with the best quality managers.”

It’s a dilemma for sovereign wealth funds and pension funds globally as they seek to make money amid stretched valuations in a multitude of asset classes from stocks and bonds to corporate credit and private equity. They’re wading deeper into riskier assets including venture capital and directly lending to companies, areas they’ve traditionally shied away from.

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The Future Fund was established in 2006 to bolster public finances from an aging population that’s living longer and needs more social-security payments. While many of the nation’s superannuation funds that invest the country’s A$2.9 trillion pension pool are bringing investment management in house to help cut fees and lift returns, the Future Fund isn’t allowed to do so.

Instead, it’s doled it out to more than 80 managers including State Street Corp. and Ray Dalio’s Bridgewater Associates LP. The fund must find new homes for its capital as it deploys money from five mandates given by the Australian government, with assets almost doubling over the past five years to A$212 billion.

The Future Fund is three years into a multi-million dollar program to improve risk management and the way it assesses manager performance. It’s working with firms including Houston-based Novus to boost transparency over its holdings and has built out a technology team headed by Richard Large to integrate data and analytics capabilities. Its investment team is learning to code in the python programming language.

“If we come back in five years, you won’t be able to tell the difference” between an analyst and a tech specialist, Arndt said. “Unfortunately for me, people who understand Excel, that’s not the tool that we’re mainly using anymore.”

Read More: A $2 Trillion Fund-Management Fee Machine Sputters in Australia

The fund posted a 14.3% return in 2019, its best yearly performance in six years, as risk assets surged on expectations for lower global rates and central bank stimulus. The fund trimmed private equity, real estate, infrastructure and corporate debt holdings while cash was lifted to maintain a so-called neutral risk.

“We think forward looking returns will be lower,” Arndt said.

Tough Talks

The focus on investment manager skill has lead to some very difficult conversations with portfolio managers on what their actual talents are and how much they’re charging, Arndt said. The Future Fund lowered costs for taxpayers and mandates have been pulled from funds including Schroder Investment Management, Janus Henderson Group Plc and Massachusetts Financial Services Co. over the past two years, according to the fund’s annual reports. It paid A$218 million in investment costs in the year to June 30, down from A$254 million in fiscal 2017, the reports show.

“The good managers are very receptive,” to conversations around fees and performance, Arndt said. “The poor managers less so. They’re not the right managers for us.”

(Updates with comment on returns before Tough Talks heading.)

--With assistance from David Ramli.

To contact the reporters on this story: Matthew Burgess in Melbourne at mburgess46@bloomberg.net;Sarah Wells in Singapore at smcdonald23@bloomberg.net

To contact the editors responsible for this story: Edward Johnson at ejohnson28@bloomberg.net, Adam Haigh

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