Future Fund beats annual return target

The $135bn Future Fund booked a 7.9pc return over the year to September, above its annual 6pc target.

Former federal treasurer and Future Fund chair Peter Costello. Pic: Stuart McEvoy

The $135 billion Future Fund has easily outstripped its annual return target, despite missing its quarterly return target over the last three months.

The fund, which was created by the Howard government in 2006 to meet unfunded public service retirement liabilities, has grown to $134.5 billion from its initial $60 billion funding.

Over the three months to September, the fund achieved a return of 0.8 per cent, below its target of 1.4 per cent.

However, the fund booked a 7.9 per cent return over the year through September, above its annual 6 per cent target.

Former Treasurer Peter Costello, who chairs the fund, recently succeeded in lowering its benchmark return by 0.5 per cent to between 4 and 5 per cent plus inflation. Since inception, the fund had returned 7.7 per cent, above its target return of 6.9 per cent.

Mr Costello said global interest rates would likely rise.

“Global markets have continued to strengthen, supported by improving economic conditions,” he said.

“Around the world there is still a degree of uncertainty over the timing of interest rate rises, although such are looking increasingly likely.”

The Future Fund will appear before Senate estimates hearings today in Canberra.

Earlier this month Mr Costello suggested a radical overhaul for Australia’s superannuation system, floating the idea that default assets — where savers fail to nominate a super fund — should be handled by the government where investing can be carried out in a much more efficient manner.

Australia’s $2.4 trillion super system is being reviewed by the Productivity Commission amid heightened concern about governance in the savings sector and the onerous level of fees charged by some funds. The system, established by the Keating government in the early 1990s, now requires 9.5 per cent of workers’ earnings to be diverted into private accounts.

Over the last quarter, the Future Fund increased its exposure to developed market equities by nearly 2 percentage points to 16.8 per cent of the fund’s assets. Wall Street markets recently touched a fresh record high.

Holdings in debt securities, such as bonds and fixed income, fell 0.7 percentage points to 9.9 per cent of the portfolio.

Cash holdings, which are considered a safe investment during times of market turbulence, fell from 21 per cent to 18.9 per cent.

“The Future Fund’s asset allocation remained steady through the quarter and consistent with the positioning we have had for some time,” Future Fund chief executive David Neal said.

“The portfolio continues to operate as intended, balancing positive returns with our focus on avoiding excessive risk. We continue to position the portfolio modestly below a neutral risk setting, maintaining our discipline to only take on risk where the potential rewards justify it.”