Australia has a fantastic national endowment in the shape of the Future Fund. Its goal is to produce investment returns of 4.5 to 5.5 per cent per annum above CPI over the medium term, which it’s achieved since its inception in 2006, through good and bad markets. Funds under management have grown from $61 billion originally to $105bn today.
It’s achieved this through a diversified and global asset portfolio and access to the best fund managers in the world. Only 9 per cent of its assets are in Australian listed equities. Its internal costs are low. It’s not trying to build wealth for the managers of the fund, it’s simply trying to be a very good fund manager, which it’s succeeding in doing in spades.
Not a bad story. Shame it’s not open to the public.
Meantime millions of Australian investors are not achieving the returns they could with their superannuation funds because they’ve got too much of their assets in local shares or in property; fund management costs are too high; manager performance is often indifferent at best; and investment advice is often compromised by conflicts of interest. This means that individual investors lose out, and ultimately in the long run our national savings are less than their potential.
So why don’t we open up the Future Fund and allow all Australians to invest with it? Any investor aiming for solid capital growth with a medium term investment horizon through market cycles could be a big winner -- this includes self-managed super funds, charitable foundations, even individual mum and dad investors.
Retail funds could be managed in a separate fund by the Future Fund, with the same asset allocation and manager selection as the principal Fund, with administration outsourced to a third party specialist provider at low cost.
Two conditions would have to be satisfied for this to work. One is that investors would have to be prepared to commit their capital for a minimum period of, say, five years, and then accept that withdrawals after that could only be on a staged basis. The Future Fund generates the returns that it does by investing in illiquid asset classes, so investors would have to be willing to lock their money away for some significant period of time. Alternatively, a modified investment option may be able to be created whereby funds are invested, say, 60 per cent in Future Fund assets and 40 per cent in cash, such that greater liquidity and lower fund management charges would be trade-offs for a lower return objective due to the cash component of the invested funds.
The second condition would need to be that investors sign a comprehensive release with the Future Fund disavowing any future legal action if the target investment returns are not produced, lest the next market downturn become an opportunity for class action lawyers to upgrade their beach houses.
This change to the Future Fund’s mandate would require legislation, but it could do great things for Australian investors. It could give them -- at a stroke -- more diversified and global investment portfolios, better risk-adjusted returns, access to fund managers they could never achieve on their own, and less dilution of their savings from fund manager charges.
Indirectly, it could also force the local fund management industry to raise its game – to provide a better service at a lower cost – more than any regulatory reform can ever realistically achieve in the teeth of opposition from vested interests.
And it could reduce systemic risk in the financial system that can build up quietly when large numbers of self-managed super funds gear up to buy property at a time when Australian residential property is fully valued by many international benchmarks.
Let’s harness the potential of the Future Fund for all Australians.