Burgess leaves the Future Fund on firm footing

The unexpected announcement that Mark Burgess plans to leave the Future Fund could be interpreted as a signal that, seven years after Peter Costello established it, the fund is entering a new phase in its relatively brief history.

Burgess, who became managing director of the fund just over two years ago, has presided over a very successful period for the fund (MARKETS: Follow the future fund, September 5). Earlier this week it announced it had produced a 15.4 per cent return for the year to June, lifting its three-year return to 10 per cent a year and its five-year return to 7.1 per cent, above its mandated target return of about 6.8 per cent for those periods.

The performance of the fund and the fact that Burgess has committed to remaining in place until his successor has been identified says that the decision to leave the fund was of his own volition. Burgess sees himself as someone who enjoys building or fixing businesses rather than just managing them and, having led the fund to a position of relative maturity, is now looking for a new challenge.

As the managing director responsible for just over $100 billion of funds and with the international visibility that comes with the senior executive role in a sovereign wealth fund, he should have no shortage of opportunities.

The 2012-13 year wasn’t just a good year for the fund – which made a couple of very big and successful tactical calls – but was the year in which it finally reached the point where it was, for practical purposes, fully invested.

Given that it was effectively launched in 2007-08 on the cusp of the global financial crisis, for much of its early history it was very cashed-up and defensive.

Over the past two years it has carefully dialled up the risk in the portfolio in pursuit of stronger returns while still building a solid defensive core of infrastructure and timberland investments, including the $1 billion or so it spent acquiring assets from the Australian Infrastructure Fund.

The big tactical shifts in the portfolio over the year, made within an overall longer-term strategic framework, were to downsize the fund’s exposure to cash and credit and increase its exposure to equities, while also shifting the balance within the enlarged equities proportion of the portfolio towards offshore markets.

Given what happened to credit during the year and the impact of the significant fall in the value of the Australian dollar this year on the value of those offshore investments, those calls were a near-perfect example of astute tactical asset allocation, for which Burgess and his team deserve considerable credit.

There is a delicate balance between pursuing bigger returns and protecting taxpayer money, which explains why the fund’s portfolio is a quite unusual mix of defensive and risk assets. The bias to offshore investments (which is sensible, given the size of the fund) and the lack of any new contributions to the fund from the federal government (because of the dearth of budget surpluses over the past six years) means the fund needs a defensive core and a reasonable amount of liquidity to support the currency hedges it has in place. The fund, and Burgess, clearly believe it now has the appropriate portfolio structure in place.

With the fund above its mandated returns and essentially fully invested, the role of the next managing director will be somewhat more routine than that of Burgess and his predecessor, the fund’s inaugural managing director, Paul Costello.

It will still involve significant tactical decisions about allocations around the core strategy that Burgess and the fund’s board of guardians have established in an environment which, in the near term, could remain quite volatile as the US begins to 'taper' its quantitative easing program and the eurozone continues to deal with (some might say 'starts' to deal with) the structural fissures exposed by the financial crisis (New weeds choke Europe's green shoots, August 15). Those are, however, more conventional issues than those the fund has had to also deal with as it moved progressively from its start-up to maturity.

Burgess’ chairman, David Gonski, will now oversee a dual-track process for appointing Burgess’ successor, conducting an international search while assessing the merits of the internal candidates. It is possible that the guardians might change the nature of the role, splitting it into two by separating the management role from the investment function.

Given the size of the fund and its status as Australia’s sovereign wealth fund, the managing director’s post should attract considerable interest and talent.

One of Burgess’ key initiatives during his period at the fund has been to make it (and its structure and strategies) more transparent and him and his key people more visible and accessible than they were when he was first appointed. Given the amount of taxpayer funds involved, hopefully his successor will adopt the same policy.