A future Costello always dreamed of

Former Treasurer Peter Costello takes the reins of the $96 billion Future Fund at a volatile time and may find the previous leadership a hard act to follow.

It seems somehow appropriate that only a day after the Future Fund disclosed its remarkable performance for 2013 that Peter Costello has been confirmed as its chairman.

Costello, of course, created the fund in 2006, ostensibly to eventually cover the Federal Government’s unfunded superannuation liabilities, but in reality to keep at least some of the surpluses Costello built up during his long period as Treasurer from being spent by a profligate Howard Government.

On Monday, the fund revealed it had returned 17.2 per cent in the year to 31 December, taking its three-year return to 10.3 per cent per annum and its five-year return to 10.6 per cent per annum. The fund, seeded with Costello’s surpluses and the leftover shares from the T3 final instalment of the Telstra privatisation, now has $96.6 billion of assets.

Costello, who has been one of the fund’s ‘’Guardians’’ since late 2009, has made no secret of his desire to be its chairman.

He controversially missed out in 2012 when David Gonski, asked by the Labor Government to canvass the Guardians on their preferred choice to succeed David Murray, was told by them that Costello was their preferred choice – and was then himself appointed chairman of the fund by Wayne Swan and Penny Wong.

Gonski was appointed for a five-year term, but resigned last month after accepting the chair at ANZ Banking Group. Costello has been acting chairman for just over a month, so his appointment comes as no surprise.

It should be said that the role, while prestigious, is narrower than that of the chair of a conventional organisation. While Costello doesn’t have Gonski’s vast and senior non-executive director experience, that’s not necessarily a pre-requisite for the Future Fund role and his appointment is likely to be generally applauded.

David Murray, as the inaugural chairman, was hands-on because he had to create the fund, its organisation and its policies from scratch.

With the fund now well-established, the Guardians’ task is to oversee the team of high-calibre investment professionals assembled by, initially, Paul Costello (no relation) and subsequently Mark Burgess.

Neither Costello nor his fellow Guardians (Azure Capital’s John Poynton is the latest addition) are going to second-guess the investment strategies and decisions of their professionals, although the Guardians do have to continually monitor and manage the fund’s governance and ensure that its strategies are in tune with its mandated returns target of 4.5 per cent plus the CPI over the long term.

The initial key task for Costello will be to oversee the appointment of a new managing director after Burgess announced his resignation last year.  David Neal, the fund’s chief investment officer, is regarded as the front-runner for the job.

The fund’s performance has been extraordinary when one considers that it effectively launched into the start of the financial crisis and, given that the Rudd and Gillard Governments didn’t deliver any surpluses, has not had any external access to new funds. Burgess will leave on a very high note.

One only has to look at the global financial markets volatility generated by the US Federal Reserve Board’s decision to begin tapering its purchases of bonds and mortgages, however, to realise that investment decision-making is not going to become any easier. On Monday, Neal warned that the current level of returns was unsustainable, given the disparity between investment returns and corporate earning s growth.

Costello and his new managing director would find that Gonski and Burgess are a hard, perhaps impossible, act to follow in the short term if risk-asset prices continue to deflate in an environment of weak global growth and if simple returns were the only yardstick.

The fund has, however, successfully navigated tricky periods in the past and now has such a substantial buffer built up over its mandated returns that it could absorb a period of somewhat lower performance.  Its investment time horizons are long term.

Costello, of course, will be hoping that doesn’t happen on his watch and that the plaudits he has received for creating Australia’s sovereign wealth fund are gilded by its performance while he is chairman.