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Australia’s Future Fund to trim return target by 0.5%

The revised investment mandate follows a federal decision to delay withdrawals from the fund for at least 10 years.

The Australian government has proposed a revised investment mandate for the Future Fund, looking to reduce the sovereign vehicle’s return target by 0.5 percent over the long term.

The revised mandate, now tabled in Parliament, reflects the changed market conditions and global outlook, said Australia’s Treasurer Scott Morrison. It also follows a federal decision to defer drawing down the fund until at least 2027.

Since its inception in 2006, Future Fund’s portfolio has achieved a return of 7.7 percent a year, above its benchmark of 6.9 percent. Its current mandate, issued in 2014, states that the fund should aim for “an average return of at least the Consumer Price Index + 4.5 to + 5.5 percent per annum over the long term”.

The new investment mandate, which will come into effect next month, sets a target return of at least the CPI plus 4 to 5 percent over the long term, implying a 0.5 percent reduction. Australia’s CPI grew by 2.1 percent over the year ending 31 March, according to the Australian Bureau of Statistics.

“Since its inception the Future Fund’s returns have grown to exceed the previous long-term target rate. But actuarial analysis indicates global investment market conditions may make it increasingly difficult for the Future Fund Board of Guardians to achieve current returns without taking on excessive risk,” said Morrison.

The sovereign vehicle announced this February that it had been reducing its exposure to property in every quarter of 2016, while increasing its allocations to private equity and infrastructure in the final three months of the year.

“The board remains conscious of uncertainty around global growth, global monetary policy, international political tensions and the potential for shocks to investment markets. We also expect prospective returns to be lower than in recent times,” added Peter Costello, chairman of the Future Fund’s board of guardians, in a portfolio update released in April.

“With all this in mind, we continue to take a patient approach to investing, balancing the need to deliver returns against our obligation not to take excessive risk.”

Last September, Future Fund said it was lowering its timberland and infrastructure allocation from 7.5 to 7.1 percent in the quarter ending in June. The fund has been gradually decreasing its investment in timberland and infrastructure since 2013, the year in which it increased its infrastructure and timberland allocation from 6.4 percent to 8 percent.

Compressed timberland returns observed by the fund in mature markets such as the US were thought to be behind the decreases in timberland allocation, as US markets are now perceived to have become too competitive.

The Future Fund currently manages just under A$150 billion ($111 billion; €100 billion) on behalf of the Australian taxpayer, across five public asset funds. The largest vehicle is the Future Fund itself, which was valued at A$129.6 billion as of 31 March.