Future Fund growth to be much faster than expected

The Future Fund could reach its target of $140 billion in just six years, much more quickly than the officially forecast 2020 date, giving governments after 2012 an extra $12 billion a year to spend on their own projects, according to a study by Citigroup.

The study, by Stephen Halmarick, director and co-head of economic and market analysis at Citigroup, was released at a special half-day seminar organised by the University of Melbourne’s Melbourne Business School last week. However, Paul Costello, the Future Fund chief executive, told the meeting that while the Government had indicated its desire to contribute budget surpluses into the fund, it was not obliged to do so under the legislation. The Citigroup study assumes all surpluses will be tipped into the fund and that it reaches its reasonably conservative returns target of 4.5-5.5 per cent above inflation. “By our estimates, the fund will be around $123 billion by June 2011; the $140 billion target is likely to be met well before 2020 and possibly as early as 2012 … The Future Fund will grow from around $18 billion late last year, to near $50 billion by June 2007 … $70 billion by June 2008, $83 billion by June 2009, $101 billion by June 2010 and $123 billion by June 2011,” Halmarick said. “If I were the treasurer or Prime Minister of Australia heading into the 2013 general election this would be a very enticing prospect,” he said. The seminar was attended by a range of academics and funds management industry executives, including consultants from the fund’s adviser, Watson Wyatt, as well as Frontier Investment Consulting. Other speakers included Jeremy Duffield, chief executive of Vanguard Investments; Leo De Bever, chief investment officer for VFMC and Mark Delaney, chief investment officer for AustralianSuper. Halmarick said that a good benchmark for the likely performance of the Future Fund was that of QIC, “which in many ways is a model the Future Fund could follow”. Over the past decade QIC had achieved an annual average return of 10.7 per cent, with the best year being almost 20 per cent in 1997-98 and the worst year a negative 4 per cent in 2001-2. “Despite some likely volatility, therefore, the Future Fund’s objective of a long-term 4.5-5.5 per cent real return per year looks very achievable in the context of the investment objectives and strategies the Future Fund has been given,” Halmarick said. The Government launched the Future Fund with $18 billion last year and transferred a further $18.6 billion on January 22, including $8.6 billion in instalment receipts from the ‘T3’ Telstra sale. It was scheduled to transfer a further $3.6 billion from last year’s budget last Wednesday. All this money is currently invested in cash with the Reserve Bank of Australia, which, with funds from other agencies, has almost $50 billion in cash. Halmarick observed that the growth of the Future Fund had not yet had any impact on markets. His paper argues, in fact, that the fund will be managed in such a way as to minimise market impact. In any case, even though it will be the biggest fund of its type, it will still make up only a small proportion of the entire institutional investment market. The first investments from the fund are likely to be a range of passively managed portfolios, Costello told the meeting, until an investment team is established. The fund has not yet announced the recruitment of a chief investment officer.