December 2024

Sovereign wealth funds are playing an increasingly important role in global development. They are used to stabilise a nation’s economy through diversification and to generate wealth for future generations. Last month, changes were made to the investment mandate of Australia’s sovereign wealth fund with the Future Fund now required to, “consider Australia’s national priorities in its investment decisions”. The question being asked is whether the decision brings the fund more in line with the industry’s mainstream, or is one of political motivation.

The Basics

Despite having a population of only 26 million, Australia’s sovereign wealth fund, the Future Fund, has around $290 billion under management, placing it in the top 20 globally. Unlike other SWFs, the Future Fund has a Board of Guardians that is responsible for managing the investments of the fund. Their duty is to maximise returns with the aim of achieving a benchmark return of CPI plus 4-5% per annum while remaining within an acceptable but not excessive level of risk. As per the most recent portfolio update, the current asset allocation includes 38.5% in equities (10.9% Australian and 27.6% global), 9.9% in infrastructure and 4.9% in property, with an annual return of 11.9% – almost double the target return of 6.8%.

National Priorities

Following a year of very strong financial results, the timing and necessity of the changes to the investment mandate have been heavily scrutinised. Legislation now stipulates that in performing its investment functions, the Board is to have regard to the following national priorities:

• Supporting an energy transition as part of the net zero transformation of the Australian economy
• Increasing the supply of residential housing in Australia
• Delivering improved infrastructure located in Australia

This seems to contradict the law which was implemented to prevent government ministers from giving a direction that could require the fund to invest in certain businesses or activities.

Short-Term v Long-Term

The current government’s plan was made clear in the Budget earlier this year when it announced that it would commit $22.7 billion to becoming a renewable energy superpower. Now, with an election looming, it continues to reinforce its image as a green superpower – a central pillar in its bid for re-election. Peter Costello, the man responsible for setting up the fund back in 2006 has expressed his view that non-intervention to protect the independence of the Future Fund is being undermined. It has been more than a decade since a change was made to the investment mandate of the Future Fund. In 2013 it excluded primary tobacco producers from its investment portfolio citing the damaging health effects of the substance.

The Future Fund currently has more than 12 billion invested in businesses that play an important role in the lives of Australians, including renewable projects, raising further questions about the necessity of an investment mandate.