Future Fund to play a fiscal policy role

Chair of the Future Fund Board of Guardians, David Murray, has outlined that the Future Fund will not only act as a vehicle to meet the Government’s existing superannuation liability, but will also be an important fiscal strategy tool for the Australian economy.

“When looked at this way the Future Fund results in positive outcomes for the economy as a whole and also for the financial markets specifically. It can facilitate high growth with less cyclical volatility,” Murray said.

He feels the main role the Future Fund can play in fiscal strategy is to increase savings when Australia’s terms of trade are strong, which will in turn help reduce the weighted cost of capital when terms of trade are weak in the economy.

“In an economy that saves through the strong part of the cycle, the bond yield is likely to be lower, inflation better contained, interest rates lower, and the margin for risk lower, so the weighted average cost will be lower and the rate of investment to maintain or build new capacity for strong terms of trade will hold up higher than it would otherwise have held up. So the Future Fund by helping this savings process makes a difference,” Murray explained.

In terms of the operation of the fund he said the Government’s aim was to have its unfunded superannuation liability, currently around $90 billion, met by the year 2020. This means the fund will be focused on the long-term and will not be concerned about market timing in putting together its properly structured portfolio.

All investments for the fund will be made through fund managers with the targeted average return of at least the CPI plus 4.5 to 5.5 per cent per annum. It is also mandated that a portion of the fund be allocated to investment offshore to facilitate proper diversification.

Murray said the fund was free to invest in infrastructure projects, but thought it would be counter-productive in relation to the ultimate objective of the project if the Government intervened in the investment decision to deliberately channel monies toward these type of opportunities.

Importantly the mandate of the fund stipulates that the investments of the fund cannot disrupt the normal operation of domestic financial markets through creating abnormal volatility levels.

While Murray revealed the operations of the Future Fund would be based in Melbourne, he could not specify a timeframe for when the fund would be up and running.

“We have none of our own people yet, we have no computer systems of our own yet, we have no custodians, we haven’t appointed any managers, we don’t have an internal auditor, and we have no system of internal controls. We are simply not in a position to invest money prudently until all of those things, in particular skilled people, are in place to do the work properly. I will make sure that we don’t start in the market towards our tactical allocation until that’s properly in place,” Murray said.