Peter Costello and the Future Fund Fiddle

Mon, 24 Oct 2016  |  

This article first appeared on The Adelaide Review website at this link: 


Peter Costello and the Future Fund Fiddle

The latest portfolio update from the Future Fund confirmed that the average annual return on its investments has been 7.7 percent since it was established in May 2006.

Former Treasurer Peter Costello, who is the Chair of the Future Fund Board of Guardians, judged this return to be good to the point where he claimed that it was successful in “exceeding the return objective”.

That is an expansive claim.

In the media release – that included details of the fund return up to June 30, 2016 – there was a table that showed the 7.7 percent annual return that Costello referred to. It also noted that the ‘target return’ or objective for the Future Fund since inception was 6.9 per cent, which no doubt leads Costello to his conclusion that the 7.7 percent was larger and had exceeded the objective.

Alas, that target return for the Future Fund in its own media release is misleading. According to the Future Fund Act 2006, the investment objective or target return is at “least the rate of inflation (measured by the change in the CPI) plus 4.5 to 5.5 percent”.

This return was designed to be achieved “over the long term” which is prudent and sensible given the inherent short-term volatility and variability in many market values.

With the Future Fund in operation for a decade, there is a reasonable long-term time-frame with which to judge its performance.

Based on the long-run target for annual inflation of 2.5 percent (set by the government and the RBA) this means that the Future Fund’s target return should be at least seven or eight percent. To ‘exceed’ its objective, the return delivered by the Future Fund would, quite obviously, need to be above eight percent per annum.

As a small aside, since the creation of the Future Fund, the average annual rise in the CPI has been 2.4 percent which suggests that target return over the decade of operation should be between 6.9 and 7.9 percent, with this slightly lower result due to the inflation rate being very low and below the RBA target in recent years.
At 7.7 per cent, the return has been around the middle of the target and no more.

The Future Fund and Costello referred to the lower end of this band when claiming success rather than the legislated target which has an upper bound one percentage point higher than in the Future Fund’s own media release.

In some respects, the over-egging of its success by the Future Fund and Costello is not all that serious. The returns have been solid and within the minimum target range it established.

It is also interesting to note that the investment strategy of the Fund is unusual for an Australian fund manager, with just 6.3 percent of the overall portfolio in Australian stocks. Interestingly and rather refreshingly, it has 22.5 percent in global stocks, over 10 percent in private equity and what appears to be a heavy weighting of 13.7 percent in ‘alternative assets’.

It is important to note that the Future Fund is managing taxpayers’ money and its main purpose is to cover the financial obligation of the superannuation and retirement costs of Commonwealth public servants. The $122 billion funds under management are set to achieve this objective, and if it can continue to achieve solid returns, it will have done a good job.

There is no need for it, or Costello, to exaggerate its success by fudging the target return and claiming success in beating it when it has done no such thing. The good news it that the Future Fund is close to achieving its aim. No more, no less.

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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link:   


The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced. 

What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.