Facing 2026, resilient, like The Future Fund

In November, the Future Fund published a position paper titled, Portfolio Resilience: Part One. This is the fourth position paper the sovereign fund has published, and each has described how the investment landscape is shifting, and previously held rules may no longer hold.

The Future Fund does not invest in a different environment than other Australian investors; its paper, therefore, should be a consideration for all investors.

Portfolio Resilience – what does it mean?

According to the Future Fund, “different investors will gravitate around different definitions of the term ‘portfolio resilience’”, these include:

• Achieving diversification
• Absorbing economic and other unanticipated shocks
• Increasing predictability
• Guarding against sustained underperformance
• Less severe loss (or drawdown)
• Robustness

While no definition is right or wrong, the Future Fund considers portfolio resilience as a collection of exposures that achieve target returns through a wide range of future scenarios.

This definition emphasises owning exposures that behave differently across different regimes. We discussed this in a recent Vector Insights, in relation to factor investing and international equities. No factor outperforms in all markets but understanding when a portfolio may outperform and when it may not could help build resilient portfolios.

Portfolio resiliency, therefore, is building a portfolio that can navigate positive and negative outcomes. A portfolio of international equities focused on AI may have done well in 2025, for example, but it would not be resilient. There would have been periods of significant drawdown and volatility.

This was highlighted in a recent AFR opinion piece, “In 2025, you did not need to fight the AI trade, you just needed to widen it.

“For Australians building international equity exposure, shifting a slice from concentrated US growth towards World ex-US value is no longer contrarian, it’s resilience.”

But we think the Future Fund is considering more than traditional asset classes in its recent paper. Portfolio construction, then, must also consider how different asset classes respond to each of these.

Inflation as an example

To illustrate how portfolio resilience is applied in practice, the Future Fund’s new paper focuses on inflation.

Inflation is a key consideration for investors as:

• higher inflation can be good for some companies as it can increase cash flows, especially for high-quality businesses. It can increase the value of ‘real assets’ like commodities which, as they are an actual thing, tend to preserve their value, as the value of the currency is being eroded by high inflation. More of the falling currency is needed to buy the commodity,
• but it can also lead to bad outcomes for companies, as it means that future earnings (which is how many investors value companies) are eroded, as a dollar of income today is worth more than a dollar of income in the future. This has a significant impact on so-called ‘long-duration assets’, like infrastructure or companies that are not yet earning income (e.g., not yet profitable technology companies).

Inflation risk is linked to the structural forces, as outlined in the Future Fund’s 2024 paper “Geopolitics: The Bedrock of the New Investment Order”. Beyond geopolitics, other factors influencing inflation include re-industrialisation, climate transition pressures, demographic shifts and labour constraints.

Together, these forces increase the likelihood of greater inflation volatility over time, reinforcing the need for portfolios that can withstand a broader range of inflation outcomes rather than optimising for a single regime.

A multi-asset approach to building inflation resilience

According to the Future Fund, no single asset or contract can provide effective protection across all inflation scenarios. Instead, it adopts a multi-asset approach and since May 2021, a significant amount of portfolio activity has occurred with inflation front of mind.

The paper lists four principles the Future Fund has used to implement its multi asset approach:

1. Asymmetric protection – favouring exposures that perform particularly well in high-inflation scenarios, e.g. commodities.
2. Attractive pricing – limiting the cost of inflation protection, given inflation outcomes remain uncertain.
3. Opportunism – targeting opportunities in which it appears the market has mispriced inflation risk changes.
4. Domestic bias – preferring assets with strong local inflation linkage, e.g., Australian small companies.

Based on these, a table in the appendix of the new Future Fund paper summarises portfolio changes since May 2021, and we think ETFs allow investors on ASX to build resilience like the Future Fund has. The Future Fund’s changes (and ETF examples) include:

• an active approach for Australian small companies (ETF example: MVS),
• focus on the quality factor (ETF examples: QUAL and QSML),
• more floating rate exposure (ETF examples: FLOT and SUBD)
• real assets (ETF examples: IFRA, REIT, MVA)
• gold exposure (ETF example: NUGG)

ETFs provide a practical way for investors to express these exposures, among others. In this way, all investors can build a portfolio consistent with the Future Fund’s and their own definition of portfolio resilience, ready for whatever may come in 2026.

Happy New Year.