[REPLAY] Raphael Arndt – Australia's Sovereign Wealth Fund CIO (Capital Allocators, Episode 70)

What It Covers

Raphael Arndt, CIO of Australia's $145 billion Future Fund, explains how the sovereign wealth fund operates with a one-team, one-portfolio philosophy. Arndt details their approach to disaggregating beta from skill, managing private markets at scale, navigating capacity constraints, restructuring fee arrangements with external managers, and positioning portfolios for economic scenarios including potential US recession.

Key Questions Answered

• •Portfolio Construction Philosophy: The Future Fund implements a one-team, one-portfolio approach where asset class teams are not incentivized on individual portfolio performance but on total fund outcomes. This enables sizing positions like tail protection strategies at 20% of the hedge fund book because they hedge whole-fund equity risk in market selloffs, rather than optimizing each asset class in isolation for diversification.
• •Equity Manager Selection Process: Attribution analysis revealed that 20 equity mandates across different styles largely canceled each other out at the portfolio level, delivering approximately beta less fees. The fund now disaggregates beta, factor returns, and stock selection skill through regression analysis, only paying active fees for pure alpha. They migrated to long-short market neutral managers with concentrated portfolios of 20 longs and 20 shorts to isolate skill.
• •Private Equity Due Diligence Framework: The fund deleveres private equity returns and removes market timing effects using public market equivalent analysis, comparing cash flows invested in the same equity index with identical timing. This reveals managers using leverage to juice returns versus those with genuine operational improvement skills. The portfolio contains zero large buyout exposure, focusing instead on small buyout and 50% venture and growth equity.
• •Venture Capital Access Strategy: Despite capacity constraints at scale, the fund built a $2 billion venture portfolio delivering over 20% net returns over ten years by focusing on early-stage managers through fund-of-funds structures. Research showed 80% of venture managers fail to return capital and only 6-7% justify their existence, but top performers demonstrate persistent outperformance because successful entrepreneurs return to managers who backed previous wins.
• •Fee Restructuring for Infrastructure Assets: For two $1 billion Australian airport investments, the fund negotiated cost-plus management fees instead of traditional 1% base plus 10% carry structures. They set one and three-year operating goals like revenue per car park and capex delivery, paying fixed dollar bonuses for achieving metrics rather than compensating for economic growth or discount rate compression, substantially reducing total fees paid.
• •Risk Management Framework: The fund runs nightly crash tests simulating correlated currency falls and equity market drops worse than the financial crisis to ensure liquidity. They maintain 15% cash for option value and flexibility, viewing the ability to buy cheap assets during downturns as more valuable than deploying capital at current elevated valuations. Three-year rolling drawdown serves as the primary risk metric for board discussions.