Speaking on a recent podcast hosted by Bridgewater Associates, Future Fund Chief Investment Officer Ben Samild detailed the fund’s approach to the more inflationary environment, the changed growth dynamics and the different levels of risk associated with different countries.

Samild explained that the sovereign wealth fund not only made about $100 billion worth of changes to its portfolio between 2020 and today, but also dramatically changed its duration exposure and took on more risk.

“We put a higher price on our liquidity and flexibility, we did opportunistic things, minor changes in our sector strategies to prioritize different characteristics within the assets that we were buying or selling,” Samild said.

"And we think all of that -- we know all of that -- has led to better performance." However, we think more importantly it has led to a more resilient portfolio across multiple potential environments.”

Discussing the new world that has emerged after a 40-year era defined by a "unipolar, dominant hegemonic, laissez-faire" environment with "ever-increasing integration", Samild said the fund must manage change while "everyone is screaming that the end of the world ”.

"We felt very strongly that this world had reached — that this rubber band had been pulled as far as it needed to be pulled, and it was going to start going back the other way," he said.

"The changing geopolitical environment that was going to lead to a change in domestic politics, the priorities for changing the environment, and it's all deglobalization, reshoring/friendshoring, strategic competition, demographics, competing industrial policies, more dirigiste management—you know, all those stuff that played out a bit and now you can't open your front page of the Bloomberg screen without drowning in that stuff.

“These were things that we identified as important, I guess, change agents in 2020. of what we saw as the secular horizon then, and we still do.'

Explaining how the Future Fund protects its portfolios against inflation, Samild said "there's no magic contract you can buy" that provides protection.

“Clearly, you have to think about it across the portfolio and try to measure it through the overall portfolio -- measure your vulnerability through the overall portfolio, which is what we do. We're trying to understand almost like the concept of the duration of inflation and how that's changed over time," he said.

“But the question is really hard, isn't it? Because whose inflation is it? Where is the inflation? What inflation? What inflation? How does that happen?'

Samild suggested that while some may see commodities as a hedge against inflation based on the experience of the 1970s, this strategy may not work if inflation is driven by massive fiscal expansion rather than supply constraints.

"We've tried to think about the kind of inflation we're worried about, what we can do, how much cost we're willing to take on, what kind of event-style issues ultimately lead to inflation," he said.

"We're not going to predict and we're not going to manage the portfolio too specifically, but we'd just like to make sure we can survive them and ideally thrive on the other side of them."

Samild added that while investors have become complacent in viewing inflation as a uniform global phenomenon, he now sees a need to be more cautious as Australian inflation can differ significantly from US inflation, making the investment landscape even more challenging. .

“Australia's inflation-linked bond market is de minimis, so I can't just go out and buy this stuff. I can go out and buy US inflation, but that may not actually match my mandate,” he said.

Previously, former Future Fund vice chairman Alicia Gregory noted that the sovereign wealth fund was exploring alternative avenues beyond the traditional bond and stock portfolio after realizing that structurally higher inflation could erode the defensiveness of bonds.

"Investors may need to seek alternative forms of protection through this type of environment, perhaps through shorter durations of private credit, differential hedging or seeking assets with higher, pass-through domestic inflation," Gregory said at the summit in Wealth Management Australia in Sydney.

The fund first warned of a changing environment in its position paper in June, in which it said investors should familiarize themselves with the complexities and potential implications of geopolitics, highlighting its key role in shaping a new investment landscape that will profoundly affect financial markets, macroeconomics and policy decisions.