Geopolitics is front of mind for the investment team at the Future Fund, Australia’s sovereign wealth fund with A$223.4 billion ($148.0 billion; €134.7 billion) in funds under management.
In a recent position paper, the fund places geopolitics at the “bedrock” of its investment strategy, using long-term geopolitical trends as a key consideration in its decision-making process.
The word ‘geopolitics’ evokes major conflicts such as the wars in Ukraine and Gaza, but the Future Fund’s report shows the term can extend to economic tensions such as those between China and the US or political events like Brexit.
The report observes that “geopolitics sits at an intersection between geographic factors, policy decisions and cultural norms”.
However, the report reflects that during the period of relative peace and stability between the Cold War and the Global Financial Crisis, “a host of risks ebbed away from view”.
“This meant that, across a generation of investors, geopolitics became underappreciated, underestimated, and then effectively forgotten about.”
Future Fund head of unlisted infrastructure and timberland James White told Infrastructure Investor that, although the fund has always tracked geopolitics as part of its investment strategy, it has come to the fore in recent years.
“The monitoring of it and being strategic in how you react to changes is going to become more important, because it’s going to create some risks, but also some opportunities.”
White said geopolitics is particularly relevant to infrastructure given the long-term nature of the asset class.
He said geopolitics can present opportunities through the emergence of new supply chains for goods and energy as countries seek to strengthen their own economies through onshoring or reduce their political risk through friendshoring – focusing supply chain networks on countries regarded as allies.
“That’s going to create some risk for people who’ve been invested in the old supply chains, but also a lot of opportunity for people that are going to be facilitating those changes that countries are looking to put in place.”
The long and short of it
The Future Fund aims to position its portfolio for long-term opportunities and risks, rather than responding to short-term market impacts or geopolitical tensions.
“It’s not necessarily linked to current or specific conflicts; it’s a shift that we’ve seen happening over a longer period, where some countries are making strategic decisions to become less reliant on other economies and trying to become more self-sufficient in things that will be critical inputs for energy supply chains,” White said.
Those critical inputs could include building up domestic renewable energy capacity or data security capabilities.
“If there’s going to be this rise in strategic competition, that potentially makes us as an investor a form of strategic capital in some jurisdictions where there might be sensitivity to who the owners of critical infrastructure are,” he said.
The uncertainty of future geopolitical events has the Future Fund advocating for a shift away from a typical “measure, monitor, manage” framework for investment.
“Given that it is so difficult to predict where and when conflicts might be happening or tensions might be greatest, it’s much more important to focus on positioning a portfolio for how you think things might play out in the long term, and where the greatest opportunities will arise from that, or where the greatest risks are,” White said.
The Future Fund expects the global trend of reindustrialisation to have an inflationary effect, which White said makes it crucial to seek out assets with an explicit link to inflation.
In June, the Future Fund acquired a 19.8 percent stake in ConnectEast, owner of Victoria’s largest toll road network including the 39km EastLink.
“We like assets that provide inflation exposure, which toll roads typically do,” White said.
The acquisition also points to the Future Fund’s appetite for Australian assets; similarly, the fund’s 40 percent stake in renewable energy developer Tilt Renewables underlines its confidence in a trend toward domestic energy supply.
The Future Fund already has more than half its infrastructure portfolio invested in Australian assets and White said it will continue to invest in this area while also exploring global opportunities that align with its sovereign wealth status.
