Australia's Future Fund now has more than $117 billion in funds under management – increasing by $15.6 billion over the year to June 30, 2015.
Designed to meet the future superannuation requirements of Australia's public servants, the Future Fund was set up as Australia's Sovereign Wealth Fund in 2004. By the end of June 2007, the federal government had transferred to the Future Fund around $50 billion, raised from government surpluses and the sale of Telstra Corporation Ltd (ASX: TLS) to the public.
In 2008, the fund was also assigned three new funds:
- Building Australia Fund
- Health and Hospitals Fund
- Education Investment Fund
A fourth – the DisabilityCare Australia Fund was added in 2013 to fund the National Disability Insurance Scheme.
There are a number of things investors can learn from the Future Fund.
Patience and a long-term outlook
In 2013, then chairman David Gonski slammed the finance industry for its short-term focus, telling the Australian Financial Review that it was unhealthy to focus on monthly and quarterly results. As we reported here, Asian countries focus on long-term investing, even at the expense of short-term results. Most of us have an investing timeframe of 40 years or more, so focus on the end goal rather than month-to-month or day-to-day.
Don't expect double-digit returns every year
The Future Fund aims to make a return of at least CPI (Inflation) plus 4.5% to 5.5% per annum over the long term without excessive risk. Over the past seven years, that target was 6.8%. Ordinary investors could achieve that simply by investing in high dividend-yielding stocks such as the banks, Telstra, Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES), holding for the long term and topping up during market downturns.
Just be aware that the current dividend yields of the banks and Woolworths may come under pressure in the next few years and could fall. There are also the risks of investing in highly-geared businesses like banks, which are closely aligned to the performance of Australia's economy.
Diversification
Holding shares in the four big banks, Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) and a bunch of term deposits is not sufficient diversification. As you can see from the Future Fund's asset allocation, just 6.8% of the fund is allocated to Australian equities, while the Fund has increased its cash balance to nearly 20%.
How does your portfolio compare?
Foolish takeaway
Investors could do worse than to replicate the Future Fund's asset allocation – and it's very easy as we outlined in this series earlier this year.
