Future Fund returns fall 3.7pc, Peter Costello warns on recessions

Future Fund chairman Peter Costello says while the government can focus on social objectives, business leaders and super funds need to deliver results and returns.

Future Fund chairman Peter Costello has delivered a veiled swipe at Treasurer Jim Chalmers’ argument about the need for a new form of capitalism, arguing that business leaders need to focus on running their business, while superannuation funds need to focus on delivering returns to their members.

Answering questions at a press briefing to discuss the Future Fund’s annual results, which showed the fund lost 3.7 per cent over the year as a result of falling sharemarkets and bond markets, the former Treasurer said it was government’s role to focus on social objectives while business and superannuation funds had their own objectives.

Mr Costello said superannuation funds and sovereign wealth funds like the Future Fund need to focus on making their investments and delivering strong returns.

He said it was the remit of other arms of government to spend on social projects.

“These things work best when you have a clear focus for a particular institution, and you can hold them accountable for that focus,” he said.

“Superannuation (funds) invest for returns for people’s retirement.”

Asked if he felt there was a need for a “new form of capitalism,” as suggested by Mr Chalmers in his recent essay for The Monthly magazine, he said businesses had to answer to boards which had to answer to shareholders.

“It has to work within the framework of the law,” he said.

“Businesses are set up to run businesses. That’s when they operate best. They are not like governments. Governments are there to decide on social objectives.

“This idea that every institution must have every purpose will just lose focus.

“Everybody knows what the rules are, and they can abide by them.

“That’s the way things have been done historically and that enables both focus and accountability.”

Releasing the results, Mr Costello has warned of the possibility of recessions in the developed world this year, as the fund reported a drop of 3.7 per cent in value during 2022 after a tough year on global sharemarkets.

On Wednesday morning, the fund said all the fall had occurred in the first six months of 2022, with the Fund recording a 0.9 per cent return in the last six months of the year.

Mr Costello said the fund’s returns had been impacted by falling markets as a result of rising interest rates as central banks moved to bring inflation under control.

“The cycle of rising rates to control inflation is not yet complete,” he said.

“It brings with it the possibility of recessions in much of the developed world.”

“The extent of further tightening and the ways in which markets and economies respond to them will be the key issues for investors.”

The Future Fund manages some $243bn in assets for the federal government, with $196bn in its main fund, which was established in 2006.

Treasurer Jim Chalmers during a press conference at Parliament House in Canberra. Picture: Gary Ramage/NCA NewsWire

Mr Costello said the fund’s “defensive posture” had limited its downside fall during a year when the S&P ASX 200 was down by 5.5 per cent over the year and the S&P 500 was by 13.6 per cent.

He said last year had seen developed economies hit with serious inflation “on a scale not seen for 30 years.”

“This brought an end to a long period of monetary and fiscal stimulus,” he said.

“Central banks’ response of rapidly increasing official interest rates to control inflation had a significant impact, driving down asset prices and investment markets.”

Mr Costello said the fund had delivered average annual returns of 9.1 per cent, against its target of 6.7 per cent, since it was started in 2006, with an initial contribution of $60.5bn, finishing 2022 at $196.1bn.

While the fund reported a positive return in the last half of 2022, Mr Costello warned that markets would continue to be affected by further rate rises to come this year as rates continued to rise.

He said the board was continuing to “focus on positioning the portfolio to be resilient to a range of possible developments while delivering risk adjusted returns,” he said.

“We expect that real returns to investors, with the context of significant inflation, will be substantially below the experience of recent years.”

Future Fund chief executive Dr Raphael Arndt said many of the tailwinds which had boosted markets in recent years had now turned into headwinds.

“That will make it tougher for investors to generate returns in years to come,” he said.

Mr Costello also made it clear that there would be dangers in any government changing the mandate of the Future Fund, which was set up in 2006 to help providing funding for retirement payments to federal public servants, to deliver social objectives.

But Mr Costello said he wouldn’t expect the government change the Fund’s mandate.

“One of the things that has been important to the Future Fund is that board at independent, arms’ length, with statutory protection, invests money for the country.

He said there had never been any attempt by any government to direct the Fund about what investments it should make.

“Once you start down that path, it would come to a very bad end if people started to think they could 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.

“The government has got plenty of money which it can spend on various social objectives and that is what it ought to do.

“This is a one-off investment fund and it will only be able to do its job if it has got independence and that it is respected by all sides of politics.”