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Donald Trump casts shadow over Peter Costello's Future Fund

Elizabeth Knight

Within three years Australians may witness one of the biggest financial raids in history when the federal government becomes entitled to take about $9 billion out of the $127 billion Future Fund, which was set up to fund public servants' superannuation liabilities.

If so, it will take place at a time when the fund – which has generally performed well over the past 10 years since it was set up – is facing increasing challenges to meet its mandated earnings targets.

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Future Fund embraces cash in worrying times

Speaking to Fairfax in April, Future Fund managing director David Neal talks about the downturn in the world's financial markets.

It's interesting that, while the impact of Donald Trump's presidency is clearly increasing the risk and levels of concern for those running Australia's sovereign wealth fund, the sharemarket rally the US election regime change has engendered has also boosted the fund's returns.

Future Fund chairman and former federal treasurer Peter Costello wouldn't be explicit on his views on Trump's policies, choosing instead to say anything that inhibited international trade or the free flow of capital was not good for investment. In other words, Trump policies were bad for investment.

"The best kind of investment climate is free movement of capital flows," he said.

This week, Trump's radical moves on restricting immigration unnerved international equity markets that, until now, had taken a very bullish stance on Trump's rhetoric on pursuing spending-based stimulatory policies.

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Costello also cautioned that, since the election, the markets might have gotten ahead of themselves and boosted the value of shares in anticipation of what Trump might do, before anything was done. "The market may have run in advance of the actuality," he said on Tuesday when releasing the Future Fund's half-year performance figures.

But it's not only the spectre of the Trump presidency that is on the Future Fund's risk radar, not even the fact the government may be set to withdraw billions from the fund in the not too distant future of 2020.

The bigger and more immediate concern is that it's becoming harder to meet the targeted annual returns of CPI plus 4.5 per cent in an environment where world growth is patchy and interest rates remain historically low in most regions.

On balance, the world investment environment – across all classes of assets – is one of low returns and increased risk.

But the Future Fund mandate requires it to avoid engaging in too much risk in order to bolster returns.

"We don't see a global growth ... that will support those historic returns," Costello said.

We don't see a global growth... that will support those historic returns.

Peter Costello

He is correct in his view that the returns possible back in 2006 are very different from the ones achievable today if an investor is risk averse.

It's a conundrum that has spurred the Future Fund to ask the government to reduce the performance targets but has yet to receive an answer. Exactly how much the Future Funds wants shaved off these targets is something Costello is not prepared to divulge.

The Future Fund's chief executive David Neal said the "fragility in the global investment landscape" was hampered by the existence of low or negative interest rates that made monetary policy response to rescue any economy that found itself in difficulty hard.

"If there was to be a shock, it's hard to see how that would be responded to," Neal said.

How the government will respond to submissions remains to be seen.

Costello and Neal must carefully walk a political tightrope. While they would like to loosen the shackles of the investment returns they are required to make, they are also keen to avoid the government using the Future Fund as a raidable piggy bank in three years' time.

Costello argued that the Future Fund – which he set up in 2006 while treasurer – had been a successful experiment and that taking money out would reduce the income the Commonwealth would receive and reduce the value of the asset.

"If you want to strengthen the [government's] balance sheet, a fund that is earning well and growing an asset on your balance sheet is useful, he said.

In the 12 months to December, the Future Fund returned 7.8 per cent, ahead of its target rate of 6 per cent, while the 10-year return was also 7.8 per cent and ahead of the 6.9 per cent target.

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