Australia’s A$75bn ($73bn) Future Fund has failed to reach its mandated benchmark return over its five-year history, but David Murray, the Fund’s chairman, says that is no reason to change its defensive investment strategy.
Speaking at an Institute of Company Directors’ function in Melbourne last week, Mr Murray – a former chief executive of the Commonwealth Bank – said the Fund needed to “keep its powder dry” in the face of the global economic situation, which he said could result in a “20-year” malaise on world markets.
The Fund, which outsources investment management to about 70 fund managers across multiple asset classes, has a mandate to return between 4.5 and 5.5 per cent plus inflation. It has returned 5.2 per cent a year since its formation in 2006, so taking inflation into account, has failed to achieve its benchmark return, even though its performance has improved significantly in the past two years.
The Fund returned 12.4 per cent in its financial year to June 30 on the portion of its portfolio that does not include shares in telecoms company Telstra, after double digit growth the previous year. The return on Telstra shares, which seeded the fund in 2006 after the flagship carrier was privatised, was 2.9 per cent in 2010-11.
Mr Murray said the Fund was a long-term investor with a 10-year time horizon and was unlikely to become more aggressive in its investment approach.
He said the Fund would not decrease its level of cash – around 10 per cent – and buy aggressively into Australian equities as forecast by some investment houses. JPMorgan, for example, has claimed the Fund would invest up to A$15bn in local equities next year.
“The strategy at the moment is to keep some dry powder and see which way things fall,’’ Mr Murray said.
“Do I think they [shares] have got low prices? Not necessarily, not to the point of being bargains, I think they are adequately priced. The markets have already marked down the value of equities to accommodate an anticipated longer period of lower growth.’’
Mr Murray’s comments are echoed by one of the Future Fund’s mandated managers, who says the investment policy is very much “steady as she goes”.
“Because of the nature of the Fund there are no really aggressive changes in investment strategy,” he says. “The word is caution as they try and steer the ship through the turbulence.”
The Future Fund was seeded from the Australian government’s privatisation of Telstra with the purpose of funding the long-term public sector pension liabilities, estimated at A$140bn ($137bn) by 2020.
Under Mr Murray’s chairmanship the Fund has progressively sold down its Telstra shares, and now holds only 0.8 per cent of the company, a stake now valued at just under A$60m.
The Fund has been at the centre of some political controversy in recent weeks, with opposition claims that the government of prime minister Julia Gillard was set to make a withdrawal from the Fund in order to return the national budget to surplus. The reports were denied by Penny Wong, minister for finance and deregulation.
Future Fund chairman David Murray said the government could only withdraw from the Fund for budgetary purposes if the rules governing the fund were changed.
He also tackled the issue of a sovereign wealth fund, a proposal that has generated debate in Australia as the country ponders how it should reap the benefits of the current resources boom.
Ms Gillard has said she does not believe a sovereign wealth fund is necessary, as Australia already has the Future Fund and a retirement savings pool of $1,400bn after 20 years of the compulsory retirement savings regime.
Supporters of a sovereign wealth fund say the Future Fund is not a true sovereign wealth fund because it exists solely to fund pension liabilities for public servants.
“This is all about the inter-generational transfer of wealth,” says Michael Power, a strategist with Investec Asset Management, who works with some of the world’s largest sovereign wealth funds and is a strong advocate of one for Australia. “What you are doing is taking a wasting asset, in this case Australia’s natural resources, and putting some of that money away because who knows when the stuff is going to run out?”
Mr Murray, who is also honorary chairman of the International Forum of Sovereign Wealth Funds, said the Future Fund could be mandated to play another stabilisation role, alongside its original purpose of funding public service pensions. However, he warned this was unwise while the Federal Budget was still in deficit.
“A government at any time can give the Future Fund some further role if it wanted to with other money,” he told reporters after his Australian Institute of Company Directors’ speech.
“There has been a lot of discussion publicly, including from the Governor of the Reserve Bank (Glenn Stevens), about the possibility of Australia having a stabilisation fund. My point is that the Future Fund as an institution could be used to take up that role.”
Mr Murray also said individual Australian states should consider using mining royalties to set up their own sovereign wealth funds. The idea is being most seriously considered in Western Australia, the centre of the resources boom.
Source: www.ft.com
Speaking at an Institute of Company Directors’ function in Melbourne last week, Mr Murray – a former chief executive of the Commonwealth Bank – said the Fund needed to “keep its powder dry” in the face of the global economic situation, which he said could result in a “20-year” malaise on world markets.
The Fund, which outsources investment management to about 70 fund managers across multiple asset classes, has a mandate to return between 4.5 and 5.5 per cent plus inflation. It has returned 5.2 per cent a year since its formation in 2006, so taking inflation into account, has failed to achieve its benchmark return, even though its performance has improved significantly in the past two years.
The Fund returned 12.4 per cent in its financial year to June 30 on the portion of its portfolio that does not include shares in telecoms company Telstra, after double digit growth the previous year. The return on Telstra shares, which seeded the fund in 2006 after the flagship carrier was privatised, was 2.9 per cent in 2010-11.
Mr Murray said the Fund was a long-term investor with a 10-year time horizon and was unlikely to become more aggressive in its investment approach.
He said the Fund would not decrease its level of cash – around 10 per cent – and buy aggressively into Australian equities as forecast by some investment houses. JPMorgan, for example, has claimed the Fund would invest up to A$15bn in local equities next year.
“The strategy at the moment is to keep some dry powder and see which way things fall,’’ Mr Murray said.
“Do I think they [shares] have got low prices? Not necessarily, not to the point of being bargains, I think they are adequately priced. The markets have already marked down the value of equities to accommodate an anticipated longer period of lower growth.’’
Mr Murray’s comments are echoed by one of the Future Fund’s mandated managers, who says the investment policy is very much “steady as she goes”.
“Because of the nature of the Fund there are no really aggressive changes in investment strategy,” he says. “The word is caution as they try and steer the ship through the turbulence.”
The Future Fund was seeded from the Australian government’s privatisation of Telstra with the purpose of funding the long-term public sector pension liabilities, estimated at A$140bn ($137bn) by 2020.
Under Mr Murray’s chairmanship the Fund has progressively sold down its Telstra shares, and now holds only 0.8 per cent of the company, a stake now valued at just under A$60m.
The Fund has been at the centre of some political controversy in recent weeks, with opposition claims that the government of prime minister Julia Gillard was set to make a withdrawal from the Fund in order to return the national budget to surplus. The reports were denied by Penny Wong, minister for finance and deregulation.
Future Fund chairman David Murray said the government could only withdraw from the Fund for budgetary purposes if the rules governing the fund were changed.
He also tackled the issue of a sovereign wealth fund, a proposal that has generated debate in Australia as the country ponders how it should reap the benefits of the current resources boom.
Ms Gillard has said she does not believe a sovereign wealth fund is necessary, as Australia already has the Future Fund and a retirement savings pool of $1,400bn after 20 years of the compulsory retirement savings regime.
Supporters of a sovereign wealth fund say the Future Fund is not a true sovereign wealth fund because it exists solely to fund pension liabilities for public servants.
“This is all about the inter-generational transfer of wealth,” says Michael Power, a strategist with Investec Asset Management, who works with some of the world’s largest sovereign wealth funds and is a strong advocate of one for Australia. “What you are doing is taking a wasting asset, in this case Australia’s natural resources, and putting some of that money away because who knows when the stuff is going to run out?”
Mr Murray, who is also honorary chairman of the International Forum of Sovereign Wealth Funds, said the Future Fund could be mandated to play another stabilisation role, alongside its original purpose of funding public service pensions. However, he warned this was unwise while the Federal Budget was still in deficit.
“A government at any time can give the Future Fund some further role if it wanted to with other money,” he told reporters after his Australian Institute of Company Directors’ speech.
“There has been a lot of discussion publicly, including from the Governor of the Reserve Bank (Glenn Stevens), about the possibility of Australia having a stabilisation fund. My point is that the Future Fund as an institution could be used to take up that role.”
Mr Murray also said individual Australian states should consider using mining royalties to set up their own sovereign wealth funds. The idea is being most seriously considered in Western Australia, the centre of the resources boom.
Source: www.ft.com
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