Welcome to Finance and Fury, the Say What Wednesday edition.

This week the question comes from Justin.

“Hi Louis  – I have been listening to your podcast for the last few months. I love all your work. I was just listening to Mondays episode of your review of the budget. And I had a question for you that maybe you could use on the podcast. The question is about the governments Future Fund and whether they could access this is a potential option as like a bail out for the current economic problems we are facing and into the future.

Seeing as some of the fund is for medical research they now need it seems. For emergency help with fire, floods and a health pandemic. Also considering in the whole fund there is $212 billion in the fund. I would love to hear your thoughts on this.”

That’s from Justin – Brings up some great points – why wouldn’t the Government use the Future Fund to help boost the economy – one major reason for this – which we will run through today –

  1. Look at the future fund, what it is made up of, and what the true intention is –

What is the future fund –

The Future Fund – called Australia’s Sovereign Wealth Fund – is an independently managed sovereign wealth fund established in 2006

  1. The statement is that it is to strengthen the Australian Government’s long-term financial position – this is what they say anyway – but will come back to this later –
    1. The board of the Future Fund also manages another five public asset funds, giving it responsibility for investing A$205 billion on behalf of the Australian Government
    2. As at 31 December 2019 – The Future Fund component was valued at A$163 billion – a large chunk of the $290bn added to the budget could have been funded by this
  2. Purpose – The legislation establishing the Future Fund describes its main object as being ‘to strengthen the Commonwealth’s long-term financial position’
    1. This is why I don’t like politician or legislative speak – most people would think that this statement means to help Australia – it is the Australian Sovereign Wealth Fund after all – but the commonwealth is not you or me – it is the Government – and those officials within it as we will see shortly –
  3. While legislation permits withdrawals from the fund from 1 July 2020, the government indicated in 2017 it intends to allow the fund to continue to accumulate until at least 2026/27 before making withdrawals. The Investment Mandate for the Future Fund is to target a benchmark return of at least the Consumer Price Index + 4 to 5 per cent per annum over the long term, while taking an acceptable but not excessive level of risk

 

History – In 2004 – it was announced at the time by Treasurer, Peter Costello

  1. It is an Interesting concept – Governments invest funds –
    1. economists questioned whether the government could save money this way and likened it to saving one’s own IOUs.
  2. The Future Fund Act 2006(Cth) received Royal Assent on 23 March 2006 – received original capital
    1. A$18 billion, derived from government surpluses as well as income from the sale of a third of Telstra in its ongoing privatisation, was deposited into the fund.
    2. 2007, the government transferred the Commonwealth’s remaining 17% stake in Telstra, valued at A$8.9 billion, into the Fund.
    3. These contributions and transfers increased the Fund to over A$50 billion by the end of the 2006-2007 financial year.
  3. 2007 – it was revealed that the Chicago-based Northern Trust Corporation had won the tender process to manage the Fund.
    1. Rick Waddell, President and Chief Operating Officer of Northern Trust, indicated that Australian companies did not have the expertise to manage the Future Fund
    2. Northern Trust stood to collect A$30 million in annual fees – but more now – Controversy arose when it was realised that the Fund will be managed by a foreign bank with no base in Australia.
  4. How is the money managed –
    1. Investment decisions – The Board of Guardians is responsible for deciding how to invest the assets of each fund, in line with the legislation and the investment mandates and independently of the Australian Government. The Board of Guardians receives recommendations and advice from the management team and reviews, approves and oversees the investment strategy.
    2. There are a range of factors that contribute to our investment strategies, including the investment mandates, the purpose of the funds and the level of risk –
      1. “Our investment approach is based on one investment team working together for the benefit of the portfolio as a whole. We call this our ‘one team, one portfolio’ strategy.”
    3. Have the normal players involved in managing the money – lots on the list – State Street, Macquarie, BlockRock, etc.
    4. Asset allocation –

So you have the Future Fund and then 5 other funds underneath this

  1. Originally it was just the future fund – but 5 additional funds now are managed by the board of the future fund – history:
  2. 2008 – it was announced that three new “Nation-Building Funds” would be created – also to be managed by the Future Fund Board.
    1. These included a $20 billion Building Australia Fund to invest in roads, rail, ports and broadband;
    2. $11 billion Education Investment Fund, which absorbed the $6 billion Higher Education Endowment Fund set up by the previous government;
    3. $10 billion Health and Hospital Fund. In that budget and the following 2009 federal budget, the Labor Rudd Government promised A$41 billion to create these new funds.
  3. 2013 – a DisabilityCare Australia Fund was established by the DisabilityCare Australia Fund Act 2013. The Fund will fund the National Disability Insurance Scheme and is also to be managed by the Future Fund Board. The Fund is to receive contributions from the increase in the medicare levy by 0.5% to a total of 2% from 1 July 2014.
  4. 2014 – announced its intention to establish the Medical Research Future Fund and the Asset Recycling Fund and to discontinue the Building Australia Fund, Education Investment Fund and Health and Hospitals Fund
    1. The Senate approved the establishment of the Medical Research Future Fund in August 2015, to be managed by the Future Fund, with interest generated going to medical research, beginning with $10 million in 2015, growing to $390m over the following three years
  5. A fair amount has changed over the years – but how it currently looks – six different public asset funds – where the Future Fund Board of Guardians is now investing over $212bn for the benefit of future generations of Australians – again – or so they say –
    1. You have the future fund itself – then The Future Fund Board is currently also responsible for five other Australian sovereign wealth funds
    2. Future Drought fund (was the Building Australia Fund) – which was an infrastructure fund to provide investment in infrastructure projects (including road, rail, ports and broadband) – created at 1 September using the $4bn that was in the Building Australia Fund
      1. Purpose – to support initiatives that enhance the drought resilience of Australian farms and communities
      2. The Future Drought Fund is in an initial transition phase while the Board develops a long-term investment strategy.
  • From the conclusion of the transition period, the Investment Mandate for the Future Drought Fund requires the Board to target an average return, net of costs, of at least the Consumer Price Index plus 2.0% to 3.0% pa over the long term while taking an acceptable but not excessive level of risk.
  1. Emergency response Fund – Created in December 2019 with the $4bn of capital that was in the Education Investment Fund – this was a fund to provide capital investment in higher education and vocational education and training
    1. The government will issue the Board with the Emergency Response Fund’s investment mandate in due course. The Future Fund Board of Guardians will develop a long-term investment strategy for the Fund in line with its investment mandate – have to wait and see what they do now
  2. DisabilityCare Australia Fund – Stile around – A fund to contribute to the cost of the National Disability Insurance Scheme – valued at A$16.5 billion.
  3. Aboriginal and Torres Strait Islander Land and Sea Future Fund (ATSILS Fund) – A fund to enhance the Commonwealth’s ability to make payments to the Indigenous Land and Sea Corporation. Established in February 2019 with a capital contribution of A$2 billion transferred from the Aboriginal and Torres Strait Islander Land Account.
  4. Medical Research Future Fund – A fund to disperse interest generated to medical research. At 31 December 2019, it was valued at $17.85 billion
    1. Paid out about $300m in grants to Unis and researchers – So for these funds they could pay some researchers I guess –
  5. Level of funds and Accessibility – could access this is a potential option as like a bail out for the current economic problems we are facing and into the future.?
    1. Technically Yes – as of 1 July 2020 – but Not the point of the fund – While legislation permits withdrawalsfrom the fund from 1 July 2020, the government indicated in 2017 it intends to allow the fund to continue to accumulate until at least 2026/27 before making withdrawals
    2. Back in March 2007 – the opposition Labor Party announced it would withdraw A$2.7 billion from the Future Fund to finance the NBN if it won the 2007 election – this proposal prompted government ministers to proclaim that Labor intended to “raid” the Future Fund for their own means – oh the irony in this statement –
      1. Labor later indicated that the use of any funds from the Future Fund towards a national high speed broadband network will have to comply and meet all requirements of any commercial investment.
      2. This included producing a commercial rate of return on the invested funds, with all profits being returned into the Future Fund allowing further investment.
    3. So the superficial reasoning – that withdrawing funds for bailing out the economy isn’t the intended purpose
  6. But there are 5 funds with pretty specific purposes – But the major fund – the Future Fund has a pretty vague purpose – to help the commonwealth – but as Justin said – using this to help the budget at the moment might provide justification –
    1. Apply this to your own personal situation – Have an investment account – the point of it is to grow over time and fund expenditure for specific things over time – like your retirement – In your own life – you might want to dip into it – but you normally cant – as it is meant to go to your retirement funds – right now if you are in financial stress – you might have dipped into your superannuation –
      1. But now – would you do this if it was to pay for someone else and their spending? This is where the future fund is relevant – Its true purpose is the funding of Commonwealth superannuation liabilities
    2. From the Future Funds Website – “The assets of the Future Fund are owned by the Australian Government and exist to make provision for unfunded Commonwealth superannuation liabilities. By helping to meet these liabilities, the Future Fund will ease pressure on the Commonwealth budget. These liabilities are currently being paid out of consolidated revenue.”  
      1. They have guaranteed their own Defined benefit pension payments – From 2020 the Australian Government can commence withdrawing money from the Future Fund to meet its unfunded superannuation liabilities.
      2. For the government – But when you can just borrow to be seen as helping the economy – then not much public backlash – but if you borrow to fund your own retirement accounts – may have some PR problems
  • Funding of politicians superannuation and retirements from tax payers may put the public against them –But they can say that The future fund is helping Australians out and not be lying – just a very specific group of Australians who had their incomes guaranteed anyway

 

So in Summary –

  1. The use of the Future Fund needs to meet a specific purpose – and also needs to get a return – Government doesn’t get any returns from covid policies – They do have around $44bn of the total $210bn allocated towards certain projects
    1. The Medical research fund of around $18bn and its income can be used– grant money to medical companies and researchers – which I guess is helping –
    2. But the lion share – over $162bn is there to keep growing to help fund commonwealth government retirement accounts when the budget runs into a deficit
  2. Government can simply run a deficit in the budget to achieve the spending for the stimulus package and the public doesn’t care as much – and if this is for Australia – then it can be justified –
  3. But what may be on the nose in the future – especially if retirees funds get depleted by market shocks created by Government policies – so a safe guard for politicians as a Sovereign Wealth fund – but don’t expect it to help bail the economy out

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

https://www.health.gov.au/resources/publications/medical-research-future-fund-mrff-grant-recipients

https://www.futurefund.gov.au/investment/how-we-invest

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