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The Future Fund has started preparing its $205 billion portfolio for a financial environment with higher inflation and warned other investors will need to follow its lead.
Speaking at the Sohn Hearts & Minds conference on Friday, the Future Fund’s chief investment officer Ben Samild said it had traded around $65 billion worth of its portfolio for assets with better protection against what is expected to be a long-term inflationary environment.
Future Fund’s Ben Samild is wary of an inflation future with higher inflation than what many are expecting. Credit: Renee Nowytarger
“We thought we needed to start building a portfolio that was more resilient to that world. So that means we’ve done about $65 billion of investing in things that we thought were less inflation resilient to things that are more inflation resilient,” he said.
Both Samild, and Bridgewater Associates’ investment veteran Atul Lele, warned that it is a very different environment compared to the recent decades of disinflation and low-interest rates, which favoured equities.
“Over the last 40 years, you’ve seen a pro corporate, pro liquidity, pro growth, disinflationary environment that’s been hugely favourable to growth-sensitive assets, to equity-centric type portfolios,” Lele said.
“And when we play the tape forward and think about, ‘okay, what’s actually going to happen from here?’ All of those dynamics are shifting … and that’s the big risk that we see out there.”
One of his big warnings has been the risk of a spike in US bond yields if their government has trouble finding buyers of its debt as the US budget deficit soars.
The US Federal Reserve and US commercial banks have been big buyers of US debt over the past few years, but they are both stepping out of the market.
“That’s why we say the big problem is that you’ve got all of this (debt) issuance coming, and you don’t have a natural buyer there, at least not at the current level of yields,” Lele said.
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