Chalmers the stock picker makes a bad call on Future Fund

The Future Fund has thrived by having the independence to make its own financial calls. The Treasurer wants to trash this with his own risky bets.

Federal Treasurer Jim Chalmers wants to drive the investment mandate of the $300bn Future Fund. Picture: Martin Ollman/NewsWire

Jim Chalmers has started down a very dangerous financial path by directing the $300bn Future Fund to start backing his pet projects.

This is a fundamental change to how one of the single biggest pools of money belonging to all Australians is managed.

One of the great strengths of the Future Fund when it was set up by former treasurer Peter Costello two decades ago was that it had the right protections so it could invest for the long-term irrespective of the whims of government.

That’s for the best, because the very real structural challenges now hobbling the budget is all the proof we need that politicians make lousy money managers.

The Labor Treasurer couches his plans for a mandate shift as requiring the Future Fund to consider “Australia’s national priorities” in making its investments decision.

Chalmers has been prescriptive by laying out three investment themes – increasing the supply of residential housing in Australia; supporting the energy shift to net zero; investing in Australian-based infrastructure that adds to economic resilience and security. 

These might be worthy nation building programs but they aren’t good financial bets.

The green energy bubble has already burst with returns a fraction of what had long been promised; housing is risky given it is mired in planning and regulatory red tape.

Infrastructure makes sense as an asset class where there’s an income stream that can be hedged against inflation.

The Future Fund invests in shares in Australia and around the world. Picture: Getty Images

The next step will be for Chalmers or a future government to change the financial objectives.

Or worse still, get even more prescriptive with the Future Fund.

This could mean diverting billions to bail out Snowy 2.0; fund inland rail; or build a vote-winning Olympic Stadium.

Costello, who later became chair of the Future Fund for more than a decade, discussed this very point with The Australian shortly before he retired in February this year.

Under various governments – both Coalition and Labor – there was never an attempt to direct the Future Fund over what investments it should make.

This gave the fund room to get on with its job, which is to invest for the long term and build a buffer for unfunded pension and military disability liabilities.

“If people start thinking they can take this money and direct it to various purposes of their own, the game would be up, there wouldn’t be any point in continuing to have an investment fund,” Costello said at the time.

“We invest for return. That’s what we’re here for.”

Future Fund chief executive Raphael Arndt. Picture: John Feder

Outside of a steep benchmark return targets of between 4 and 5 per cent above inflation, the Future Fund has operated under two very broad investment directions, and this has enabled it to grow and be taken seriously as a global sovereign wealth fund.

These are: investment decisions should not result in any abnormal change in the volatility or operation of Australian financial markets; and its investment decisions don’t cause any reputational damage for the commonwealth government.

The fund, too, has limits on owning companies outright, with its investments made by the way of external funds to further insulate the government.

On these broad guard rails, the Future Fund makes its own decisions when and where to invest in order to hit the targets (which Chalmers has retained).

There’s a well-established process under fund chief executive Raphael Arndt into shaping the investment portfolio, taking into a range of factors around risk and investment themes.

The fund takes a whole of portfolio approach and looks offshore and in Australia.

Management involves constant shifts in allocation over shares, bonds, private equity, property and other overlays.

Chalmers now reckons he can do better as stock picker than the Future Fund professionals.

However, it’s our money that he is playing with.

Originally published as Chalmers the stock picker makes a bad call on Future Fund