The Future Fund will be permitted to invest in Australian infrastructure and property without using an external manager for the first time in a move that chair Greg Combet believes will bring down costs and allow it to access opportunities it might otherwise have been unable to.
The change to the Future Fund’s long-standing obligation to exclusively use external managers does not require new legislation – only permission from the Treasurer, Jim Chalmers, and the Finance Minister Katy Gallagher.
But the fund “does not anticipate a significant shift away from the way in which [it] partners with external managers”, Combet said in a speech to a Committee for Economic Development of Australia (CEDA) event in Sydney on Tuesday.
“We continue to recognise the benefits these partnerships bring in terms of insights and skills and our ability to remain focused on the overall portfolio.
“But the capacity to be able to make transactions and manage investments in infrastructure and property within Australia – to do so internally – will increase our flexibility and reinforce our focus on value for money, and it’s a further example of the way in the fund continues to evolve the way it invests.”
At end March, the Future Fund had 4.8 per cent of its assets ($11.6 billion) invested in property and 10.2 per cent ($24.6 billion) invested in infrastructure and timberland.
The Future Fund currently employs more than 100 external asset managers, and has been a proponent of external management as many super funds have shrunk their rosters. Its outsourced approach has also commonly been seen as a brake on the potential exertion of political pressure to invest in particular sectors or assets. It has, however, engaged in co-investments in the past and does hold board seats at assets like Melbourne airport.
Investment Magazine understands that the changes would also allow the fund more latitude to invest in the areas of national priority – which include the energy transition, residential housing and infrastructure – identified in last year’s controversial changes to the Future Fund’s investment mandate, as well as potential defence-related infrastructure assets where the pool of managers is tiny.
The Future Fund doesn’t anticipate that it will internalise management of more asset classes any time soon, with concerns that building out internal trading functionality or adding significantly to its investment team headcount would only distract from what was going into the portfolio.
“To undertake internal management, the board obviously needs to be satisfied that we’ve got the right resources, the right skills, the right processes and technologies to ensure that such a move is cost-efficient,” Combet said.
“But that additional capability is intended to help access new opportunities in Australian infrastructure and property that we might otherwise be unable to access efficiently, or which external managers may not have been focused on.”
The move is also viewed as a way to bring more dollars home as the fund grows increasingly cautious on the investment and geopolitical outlook for the United States.
Combet said the election of Donald Trump as US president last year has “added layers of volatility and uncertainty”, adding that the Future Fund was focused on the US’ retreat from global security and economic arrangements, and on the uncertainties that have arisen as a result of that waning influence.
“We’re also mindful of the geopolitical contest between China and the US, including the race to dominate in artificial intelligence capability,” he said.
“The US tariffs and their likely macroeconomic impact are on our mind… The dollar has fallen about 10 per cent this year against major currencies, and continuing depreciation may be significant for global capital flows of asset values.”
Investors also have to contend with the “big beautiful bill” – the US’ budget reconciliation bill – which contains Section 899, which “potentially and dramatically escalate” tax rates for foreign institutional investors like the Future Fund.
“In combination, these policies and dynamics are making the US a more risky and uncertain investment destination,” Combet said.
“The factors I’ve highlighted are alerting investors that elevated risk demands a higher return on capital and that they may be overweight US assets.
“So while the US will undoubtedly continue to offer many attractive investment opportunities at the margin, I think it’s fair to say that it’s become a less attractive investment destination than it was, and maybe likely to see a smaller share of capital flows going forward.”
Those changes, if not permanent, will t be long-lasting, Combet said, and the Future Fund is reviewing its short- and long-term investment scenarios.
“What will the investment environment look like under the Trump Administration and beyond? It seems unlikely that even dramatic reversals of Trump policies would engender a return to business as usual approach from long-term investors now that some doubt has been sown.
“And the trend towards deglobalisation, greater political tensions, geopolitical tensions and multi-polarity pre-date Trump and ca be expected to post-date the Trump era. We certainly don’t think at the Future Fund that the dynamics I’ve spoke of will pass and return the world to the norms of yesteryear.”
