Mandate: Australian bank bill swap rate plus 0.3% per annum over rolling 12-month periods while minimising the probability of capital loss.

Building Australia Fund

Earnings for 2018-19: $0.1 billion

Return 2018-19: 2.3%

Earnings since inception: $2.3 billion

Return since inception: 3.5% per annum

Cash flow history at 30 June 2019:

Education Investment Fund

Earnings for 2018-19: $0.1 billion

Return 2018-19: 2.3%

Earnings since inception: $1.7 billion

Return since inception: 3.5% per annum

Cash flow history at 30 June 2019:

Interpreting the Investment Mandate

The Investment Mandates for the Building Australia Fund and the Education Investment Fund, known collectively as the Nation-building Funds, were issued to the Board by the responsible Ministers in July 2009 and are available at Appendix B and on our website.

In summary, each Mandate:

• benchmarks returns against the Australian three-month bank bill swap rate +0.3% per annum on a rolling 12-month net-of-fee basis.
• requires the Board to invest in such a way as to minimise the probability of capital losses over a 12-month horizon
• requires the Board to act in a way that:
  • is consistent with international best practice for institutional investment
  • minimises the impact on the Australian financial markets
  • is unlikely to cause a diminution of the Australian Government’s reputation in financial markets
• allows for a review of the Mandate, including the benchmark return, by the responsible Ministers in consultation with the Board of Guardians.

Risk profile

We are required to invest the assets of the Funds in such a way as to pursue the benchmark return while minimising the probability of capital losses over a 12-month horizon.

In July 2019 the Parliament passed the Future Drought Fund Act 2019. The assets of the Building Australia Fund were transferred to the Future Drought Fund on 1 September 2019 with the Future Fund Board of Guardians responsible for investing the fund. The Building Australia Fund was closed.

The Government has also indicated that it intends to abolish the Education Investment Fund, with the uncommitted balances transferred to a proposed Emergency Response Fund. The timing of this process is uncertain. Accordingly, we continue to maintain additional liquidity in the Education Investment Fund portfolio.

Investment Review

Strategy

Our core strategy is to invest in a combination of shortand medium-term domestic and global debt instruments, providing some yield above the base cash rates while maintaining a high quality and defensive profile. The portfolios continue to be positioned in a highly liquid manner.

Report

During 2018-19 we continued to manage the Nation-building Funds in accordance with their Mandates, with little activity during the period. Performance in 2018-19 was in line with the benchmark for each Fund.

Building Australia Future Fund strategy exposure at 30 June 2019

Building Australia Fund region exposure at 30 June 2019

​​Education Investment Fund strategy exposure at 30 June 2019

Education Investment Fund region exposure at 30 June 2019

Performance

The benchmark return for each of the Nation-building Funds in 2018-19 was 2.3%. Both Funds met this benchmark, each achieving a return of 2.3%.

The value of the Building Australia Fund was $4.0 billion at 30 June 2019. The value of the Education Investment Fund was also $4.0 billion at 30 June 2019.

Costs

Cost management

We continue to closely monitor costs in the asset classes in which we invest, reviewing the expected returns and costs of implementing the investment strategy on an ongoing basis. In negotiating fee arrangements, we focus on securing arrangements that offer value for money for skill and resources applied, that are competitive relative to other managers in the sector and that provide for strong alignment between managers and our organisation.

All returns reported are net of costs.

Direct costs

Direct costs, previously reported as management costs and transaction and operational costs, reflect all directly incurred costs associated with the management of the Nation-building Funds.

The Nation-building Funds’ direct costs over the last three years are shown below. This includes the direct cost ratio (direct costs divided by the average net assets for the financial year).

Changes in costs over the years reflect changes in the size of the Nation-building Funds and the investment activity undertaken during the year.

Summary of direct costs and direct cost ratio

Building Australia Fund

Education Investment Fund

Cost disclosures under section 81 of the Future Fund Act 2006

Under its statutory arrangements the Board also reports costs in accordance with section 81
of the Future Fund Act 2006.

Building Australia Fund

Education Investment Fund