Introductory statement

As required by the Future Fund Act 2006 and the Public Governance, Performance and Accountability Act 2013 (PGPA Act), this annual performance statement relates to the Future Fund Management Agency (Agency) and the Future Fund Board of Guardians (Board) as if they were a single Commonwealth entity (collectively referred to as the ‘organisation’).

As the Accountable Authority of the organisation for this purpose, I present the annual performance statement of the organisation, as required under paragraph 39(1)(a) of the PGPA Act. In my opinion, this annual performance statement is based on properly maintained records, accurately reflects the performance of the organisation, and complies with subsection 39(2) of the PGPA Act.

Hon Peter Costello AC
Accountable Authority, Future Fund Management Agency
Chair, Future Fund Board of Guardians
24 September 2019

Purpose

The organisation is responsible for investing for the benefit of future generations of Australians. Established in 2006 as Australia’s sovereign wealth fund, its main objective is to strengthen the Commonwealth’s long-term financial position.

The Board has responsibility for investing the assets of special purpose public asset funds including the Future Fund, the Medical Research Future Fund, the DisabilityCare Australia Fund and two Nation-building Funds (the Building Australia Fund and the Education Investment Fund).

In February 2019 the Board also took on management of the Aboriginal and Torres Strait Islander Land and Sea Future Fund (ATSILS Fund).

Each fund is established by legislation and the risk and return objectives for each of the funds are set by Investment Mandate Directions issued by the Treasurer and Minister for Finance to the Board.

The Agency supports the Board with investing funds for which the Board is responsible in line with the Investment Mandate Directions for each fund.

The Portfolio Budget Statements identify the Outcome as: Make provision for the Commonwealth’s unfunded superannuation liabilities, payments for the creation and development of infrastructure and payments from the DisabilityCare Australia Fund and Medical Research Future Fund by managing the investment activities of the Future Fund, Nation-building Funds, DisabilityCare Australia Fund and Medical Research Future Fund, in line with the Government’s investment mandates (Outcome 1).

Results

As an investment institution, the achievement of the return and risk objectives set by the Government for each special purpose public fund is the key measure of performance. These expectations are set out in the Investment Mandate Directions issued by the responsible Ministers.

The ATSILS Fund was established in February 2019 and is not reflected in the performance criteria set out in 2018-19 Portfolio Budget Statements or the organisation’s Corporate Plan. Noting that the Fund is in an initial transition period, the organisation is developing a long-term strategic asset allocation, and performance results are not discussed in this statement.

Performance criterion one – management of the investment of the Future Fund

Provide assistance and advice to the Board in pursuit of achieving the Investment Mandate target return over the long term (interpreted as rolling 10-year periods) with acceptable but not excessive risk.

The target return set out in the Investment Mandate is an average of at least 4% to 5% above the Consumer Price Index (CPI) over the long term.

Criterion source

2018-19 performance criteria outlined in the 2018-19 Portfolio Budget Statements (Outcome 1, Program 1.1) and the 2018-19 Corporate Plan (Section 3, Performance).

Result against performance criterion

Performance against the Future Fund Investment Mandate Direction is set out in the table below.

Returns: Future Fund

Performance criterion two – management of the investment of the Australian Government investment funds

Provide assistance and advice to the Board in pursuit of achieving the Investment Mandate Direction target returns as follows:

• For each of the Nation-building Funds and the DisabilityCare Australia Fund, the Australian three-month bank bill swap rate + 0.3% per annum, calculated on a rolling 12-month basis while minimising the probability of capital loss over a 12-month horizon.
• For the Medical Research Future Fund, an average return of at least the Reserve Bank of Australia Cash Rate target +1.5% to 2.0% per annum, net of investment fees, over a rolling 10-year term with acceptable but not excessive risk.

Criterion source

2018-19 performance criteria outlined the 2018-19 Portfolio Budget Statements (Outcome 1, Program 1.2) and the 2018-19 Corporate Plan (Section 3, Performance).

Result against performance criterion

In 2018-19, the Nation-building Funds (the Building Australia Fund and Education Investment Fund) each achieved a return of 2.3%. The target benchmark return for the Nation-building Funds during the period was 2.3%.

In 2018-19 the DisabilityCare Australia Fund generated a return of 2.2%. The target benchmark return for the period was 2.3%.

From inception in September 2015 to 30 June 2019, the Medical Research Future Fund has generated a return of 4.5% pa against a target benchmark return of 3.0% pa. In 2018-19 the Fund achieved a return of 5.2%, exceeding its target benchmark of 3.0%.

Analysis of performance against purpose

The organisation is performing well against its stated purpose.

The Future Fund has exceeded the target benchmark return over each time period since inception adding over $102.1 billion to the value of the Future Fund. These returns have been delivered while avoiding excessive risk.

The Medical Research Future Fund has exceeded its target benchmark return since inception. We have continued to diversify the Fund in line with our investment strategy in 2018-19. The Fund also exceeded its target benchmark over a one-year period, noting that returns are to be assessed over rolling 10-year periods.

The Nation-building Funds also performed well, meeting their target benchmark in 2018-19. The DisabilityCare Australia Fund achieved a return of 2.2%, marginally below its target benchmark of 2.3%.

2018-19 was a challenging year for investors. The first half of the financial year was characterised by volatile markets as concerns regarding geopolitical issues came to the fore. This led to a period of monetary policy easing by central banks which, together with market expectations of further easing and continued global economic growth, supported strong asset returns in the second half of the year.

In the longer term the global economy will face structural challenges including demographic shifts and high levels of debt.

We maintain our view that long-term forward-looking returns are lower relative to history. We will continue to exercise patience and diligence in investing the assets of the funds in line with their relevant Investment Mandate Directions.