The Future Fund is scheduled to be seeded with $18 billion by July 1 next year, but the legislation introduced to Parliament last week is scant on details as to how the fund will operate.

The Future Fund Bill has afforded the chairman of the board of ‘guardians’ – David Murray – considerable discretion over how the management ‘agency’ is to be run and the scope of its investments. The other six members of the board will be announced in the new year. The fund must invest in financial assets only, cannot own more than 20 per cent of an offshore-based listed company and has some restrictions on its capacity to borrow. But probably the only requirement which will worry the board is the setting of an asset-level target each year by an actuary to be appointed by the Minister – possibly the Australian Government actuary. The board cannot include Commonwealth employees but the management agency and advisory bodies can. The Bill allows for up to five separate targets for different time periods, which should keep the consultants and investment managers busy. Borrowing is not permitted in order to leverage an investment, or as part of ‘speculation’, and has to be short term and not cover more than 10 per cent of the fund’s assets. The fund will be able to invest in derivatives, for market exposure, and can engage in securities lending arrangements. So far, Watson Wyatt has been engaged to advise on the ‘investment mandate’ to Treasury. Tenders are yet to be called for the second asset consultant, which is expected to advise on manager selection and implementation issues. Watson Wyatt has been at the forefront of new investment strategies such as alpha and beta transport and the use of concentrated portfolios to both enhance returns and reduce risk. Despite misgivings in some political quarters, it appears from the Bill and other evidence to date that Peter Costello, the Treasurer, has been good to his word that the fund will be unfettered by interference. The board members, although appointed by the Minister, must have relevant experience dealing with financial assets, so even if they turn out to be cronies, at least they will be experienced or professional cronies. While there is no longer any point in asking the question, again, as to why the Commonwealth super funds, PSS/CSS, couldn’t have achieved the same proposed outcome as the Future Fund, with less cost and fanfare, it appears the Future Fund is being given the opportunity to establish the best possible risk/return profile. The only stumbling block is those Telstra shares, which are not referred to in the Bill. If the Government’s stake in Telstra does get parked in the fund, it will clearly dramatically alter the portfolio, to the point that all the fancy risk budgeting the consultants do will be meaningless. Most of the interest now will centre on the six guardians to join David Murray on the board, followed by the staffing of the management agency, appointment of further consultants and managers and other service providers. That is, Costello has so far de-politicised the Future Fund in terms of its likely operation. So far, so good.

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