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Building the Future Fund with ETFs

·Head of Distribution, Bell Direct
·4-min read

What is the Future Fund?

The Future Fund is an independently managed sovereign wealth fund that was established in 2006 to strengthen the Australian Government’s long-term financial position. It was designed to provide for unfunded superannuation liabilities in the future that will be payable during a period when an ageing Australian population is likely to place significant pressure on the government’s finances.

It’s known for being “well-diversified,” and outperforming the super system by about 3.2% over the past 10 years to 2017. The Future Fund’s objective is to achieve an average annual return of the Consumer Price Index, plus 4% to 5% per year. As of 30 September 2021, it was valued at $199billion and the one-year return has been 22.3% as the fund benefits from rebounding equity markets post the initial COVID-19 shock in March of 2020.

Asset Allocation of the Future Fund

Source: Future Fund. Portfolio update at 30 September 2021 (25 October 2021)

 

The strategic asset allocation of the Future Fund is not unlike other growth portfolios designed by professional investors and made available to retail investors. Now that all of these asset classes are available on the Australian Securities Exchange (ASX) through Exchange Traded Funds (ETFs) retail investors are able to change the way they think about investment portfolios.

A quick recap on the benefits of ETFs

ETFs are a collection of investments within a fund, that you can buy or sell on the ASX. Like individual stocks, ETF shares are traded at prices that change based on the price of the assets that each ETF holds. ETFs are beneficial because they can give you access to a wide range of markets and help you diversify your portfolio in a low-cost way. Investors can also get started in an ETF for as little as $500.

You can use Bell Direct’s ETF comparison tool to compare the features of all ETFs listed on the ASX. You can filter by asset class, sector, provider and fees, as well as looking at price information, fact sheets and performance.

  

Building the Future Fund with ETFs

Are all ETFs created equally? The short answer is no. Let’s build the Future Fund simply using popular ETFs in each asset class.

For example, invest in Australian Equities with ASX:IOZ, which contains 200 of the largest Australian stocks. 

When it comes to Global Equities, look at ASX:VGAD which has over 1,500 stocks from 20 developed market economies, and ASX:IEM which has over 800 stocks from 12 emerging market economies. 

Private equity is difficult to manage in an ETF structure due to the illiquid nature of private equity investments so we have added a listed investment trust that holds a diversified portfolio of global private equity investments yet can still be purchased on the ASX. 

For property, look at ASX:DJRE which contains 218 global real estate stocks across 15 economies. The Future Fund has a proportion of their investments in infrastructure, so look at ASX:VBLD which has 140 global infrastructure stocks including transportation, energy and telecommunications. 

When it comes to debt Securities, consider ASX:IAF which has over 500 Australian bonds issued by the Australian Treasury, Australian semi-government, supranational and sovereign entities and corporations. 

In the alternative assets category, consider ASX:MPS05 (mFund) which provides diversification through currency, global macro and managed futures strategies. 

For cash look at ASX:AAA which are bank deposit accounts with selected banks in Australia. Always make sure you understand what you are buying and read the providers’ factsheets. 

Now if you are like me and don’t have $199billion to invest, let’s look at what a $10,000 investment looks like. The below portfolio reminds us that we don’t need to mistake simplicity for a lack of sophistication. 

In just a few trades, you can access over 1,850 stocks and bonds across more than 30 developed and emerging market economies. Significantly simpler than hiring over 100 investment managers like the Future Fund does. 

The above portfolio is for illustrative purposes only and you will need to design an asset allocation that is right for you and select investments that suit your long-term investment objectives. The performance of these ETF’s cannot be guaranteed and structuring a portfolio of ETF’s is not guaranteed to produce returns exactly the same as the Future Fund.

There is a widely recognised 1986 study by Brinson, Hood and Beebower that found the strategic asset allocation of a portfolio accounted for the vast majority of its returns. So, setting an asset allocation that’s right for you is important. ETFs make the implementation significantly easier than the staggering amount of time and research that goes into selecting investments for the Future Fund. 

 

Bell Direct is a simply better approach to online investing. Find out more about ETFs here.

 

Disclaimer: Investing in stock markets involves the risk of loss.

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