Australia’s Future Fund has reduced its exposure to Australian property while increasing its allocation to US and emerging real estate markets, according to its 2015-16 annual report.
Property made up 7% – or AUD8.6bn (€5.9bn) – of total assets under management as of 30 June this year.
The Future Fund said its property strategy globally was to invest in direct and listed property.
“We primarily take equity positions,” the fund says in its report, “but will consider debt if we believe it is the best point of entry.”
The exposure of Australia’s sovereign wealth fund to its home market fell from 31% at 30 June last year to 20% at 30 June this year, most of that reduction was in listed property.
Over the same period, the fund lifted investment in property in its US portfolio from 45% to 53%, and its exposure to property in emerging markets from 2% to 8%.
Its exposure in property in Europe, the UK and Japan remained largely unchanged.
The fund said the environment for new investment remained “challenging” but that it continued to find opportunities given the divergence across geographies.
“We are also seeking to exploit certain themes,” the report says, “such as changing consumer preferences supporting the dominance of well-located retail centres with strong food and entertainment offers and increasing demand for modern logistics space.”
During the year, the fund invested in US, European and Australian logistics.
Its total holdings in logistics assets rose from 11% in 2014-15 to 12% in 2015-16.
Interestingly, its exposure to retail dropped from 38% to 32% in that same period, while its investment in residential rose from 15% to 18%.
The fund said it was increasingly focused on income generation.
It has also made new investments in US residential and European retail and office over the past year.
“There continues to be a reward above core returns for those investors prepared to accept and solve for risk, and we are opportunistically seeking to exploit this,” its report says.
The property market continued its positive momentum, driven by strong investor demand for assets with suitable income return.
The Future Fund said: “We are also finding that volatility in the listed market is providing interesting opportunities for investors prepared to act decisively.”
The fund established a new position in the US-listed REIT market and extended or added to its mandates with several existing partners, while trimming back its position on A-REITs.
On infrastructure, it invested AUD390m in funds and co-investments managed by four opportunistic managers, including a new manager appointed during the year.
It disposed of about AUD1bn of its more mature offshore infrastructure investments.
It also further reduced its listed infrastructure holdings, “reflective of the overall reduction in risk across the Future Fund portfolio”.
As of 30 June, the fund had AUD8.2bn invested in infrastructure and timberland, representing 6.7% of its total AUM, and a further AUD2.2bn committed to opportunistic infrastructure funds and in separate accounts.
Future Fund assets reached AUD123bn over the year, doubling the initial federal government contribution of just over AUD60bn made in 2006 to establish the vehicle.
Returns last financial year slipped to 4.8%, below its target of around 5% a year.
The fund said returns, including the 2015-16 result, had averaged 7.7% per year since inception.