Australia’s $130 Billion Wealth Fund Bets Inflation to Persist

(Bloomberg) — Australia’s sovereign wealth fund is positioning for inflationary pressures to persist around the world, betting that gold and other commodities will offset crimped returns across asset classes.

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Future Fund Chief Executive Officer Raphael Arndt said “a few percent” of the firm’s A$193 billion ($130 billion) of assets is now invested in gold, after making its first foray into the broader commodities sphere this year. Rising interest rates to combat inflation, combined with war and deglobalization, are working to undermine a conventional 60-40 portfolio split of stocks and bonds, he said.

“We want to look for inflation protection,” Arndt said in an interview Friday. “We have started buying commodities, gold — for the first time ever — diversifying our exposures.”

With the plunge in global equities and bonds this year, many investment firms are grappling with ways to cushion their funds. Arndt expects heightened geopolitical tension and deglobalization to spur stickier inflation, requiring central banks to keep interest rates at restrictive levels. This lifts the risk of stagflation, weakens equity returns and will diminish the defensive role played by bonds, he said.

Read how lockstep moves are smashing 60-40 portfolios

“It’s not sensible to keep that same approach to portfolio construction,” Arndt said, referring to the 60-40 notion. The firm detailed its approach in a research paper released Monday.

Instead, the fund is targeting assets that protect against rising prices, such as commodities and real assets, as well as venture capital, private equity and hedge funds. Meantime, the firm last week finalized a deal to take a 3% stake in Sydney Airport, Arndt said.

Infrastructure Assets

Arndt said the fund was looking at “very targeted” real estate and infrastructure deals and that the Sydney Airport equity stake would complement its existing holding of Telstra InfraCo Towers, a mobile phone infrastructure network.

The fund has also established a function to manage liquidity in the portfolio as the chance of another destabilizing event, like the UK’s gilt market crisis in September, remains present due to continued changes in rates.

“We expect those types of surprises will continue while the Fed withdraws liquidity from the market,” he said.