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Future Fund must look global to avoid distorting Australian markets, says Russell
SYDNEY, 11 May, 2005 – The Government’s proposed $16bn ‘Future Fund’ could lead to a
fundamental distortion in the pricing of Australian assets unless carefully managed, according to one
of the world’s largest investment consultants, Russell Investment Group.
Although not as yet legislated, the Future Fund is likely to invest future budget surplus and
proceeds from the remaining sale of Telstra, earmarking the funds to meet the Government’s
superannuation liabilities – currently around $91bn and set to rise to $140 bn by 2020. Russell
welcomes the Future Fund as a positive step to addressing this situation, and is supportive of the
Government’s intention to set a broad investment mandate to permit the Future Fund Board to pursue
global diversification of investments.
“We urge the Government to ensure that the investment parameters of the Future Fund are
driven by sound investment principles including global diversification, careful investment manager
selection and a long-term return outlook, rather than domestic or political considerations. In this
regard, a clear mandate from the Government to the Future Fund Board for best practice corporate
governance is essential,” said Mr Andrew Lill, Senior Consultant Institutional Business for Russell
Investment Group.
Mr Lill said the eventual size of the Future Fund could be equivalent to almost 10 per cent of
Australia’s superannuation savings – a sum that would be hard to invest in the Australian listed and
unlisted markets.
“Given the size of the seed capital and further expected contributions, Australian bond and
property markets might suffer from further imbalances in supply and demand, leading to increased
upward pressure on prices. The limited breadth and depth of the Australian equity market would also
preclude liquid investment in all but the largest stocks in the ASX index, again leading to potentially
artificial price pressures. This is only compounded by the fact that the Australian index has been
losing its largest players – such as News Limited – to offshore markets,” Mr Lill said.
“While infrastructure projects and private equity markets are natural homes for
superannuation assets, Australian managers have already been commentating about a lack of local
investment opportunities and are looking to the UK and North America for fair value and broader
opportunities. Therefore advisors appointed by the Future Fund Board should exhibit global reach
and experience in transacting large funds.”
Russell advises some $2.5trillion in assets globally including large local funds such as BHP
Billiton and News Limited corporate super funds. Mr Lill said effectively managing very large sums
of money to achieve a desired return outcome over a set time frame was not a simple task. He
pointed to efficient implementation of large portfolio strategies as a key problem that many of
Australia’s larger super funds and fund managers are already grappling with.
“While the upside is that Australia is taking positive steps to fund its ageing population, the
reality is that Australia’s financial markets risk being swamped by the weight of money coming from
superannuation, and the Future Fund will add significantly to this problem,” Mr Lill said.
“Russell is seeing more and more fund managers of both listed and unlisted investments
struggle with capacity issues and many of the more exciting new domestic strategies are practically
closed to new money by the time they are launched,” he said. “We hope the Future Fund will take a
strong global approach and provide some broader impetus for Australians to look further afield for
their superannuation as well as non-superannuation investments.”
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