The Future Fund is normally an institution that Australians look to for comfort and stability. After all, the $179 billion sovereign wealth fund technically belongs to all of us.
So it might raise some alarm bells that the future fund is reportedly worried about future inflation. According to a report in the Australian Financial Review (AFR), that's what the Future fund's chief executive Raphael Arndt has flagged in a Senate hearing today. The Fund is reportedly hiring more than 150 extra staff to "prepare for fundamentally changed market conditions".
Here's some of what Mr Arndt said on this matter:
The ability to generate strong returns into the future is more complex and challenging than ever before given the low level of interest rates around the world…
Policy settings continue to support markets for the time being. But this is priced into assets and unwinding these measures will be a complicated exercise… Equally, a failure to reduce the stimulus at the appropriate time could fuel a significant increase in inflation, a risk markets are already starting to focus on.
Future Fund warns of future inflation
Inflation matters enormously in the investing world. That's due to its potential effects on asset prices. Inflation usually brings higher interest rates with it too. This is what seems to have Mr Arndt concerned.
Higher interest rates usually result in falls in asset prices. That's because 'risk-free' alternatives like government bonds pay higher interest as a result. Most investors would understandably rather have a government bond paying a 4% interest rate than an ASX share which offers a 4% dividend yield.
Since interest rates have been at near-zero levels, investors have been jumping into other asset classes in the hunt for yield. But that could (and probably will) change if rates start rising. And this represents a fundamental risk to a fund like the Future Fund, which is already close to fully invested.
According to the AFR, the Future Fund has returned an average of 9.1% per annum over the past decade. That's an easy beat on its 6.1% per annum target. But clearly, Mr Arndt is worried this might not continue for the next decade without some extra (and skilful) hands on deck:
To continue to be successful and to continue to be able to meet what is an increasing challenging investment mandate with interest rates at zero around the world, we needed more staff.
All ASX investors might benefit from taking these comments to heart. If interest rates start to rise, it could well provoke some substantial volatility in all financial markets. Perhaps something we should all be ready for.
