How an Ordinary Investor Can Mimic the Australian Future Fund

Face in hands. A slow shake of the head. Even the world’s greatest optimist would be struggling with the current level of political debate.

As the shenanigans in Canberra descends past the farcical, it’s tempting to look back to another time. A period when there was a notion that governments should be able to, well, govern.

Back then, unless the opposition was vehemently opposed to a piece of legislation, they would let the government get on with the job. And if the punters didn’t like what they got, they’d soon turf out the current mob and give the other side a go.

Given the way that politics has unravelled over the last decade, it would be difficult to find any pollie who could reel off a list of any great achievements. They might even be lucky to name just one!

But last week, a former federal treasurer got the chance to do just that.

A big idea…that actually worked

It seemed like a great idea at the time. However, a decade later, it has proven to be even more successful than originally hoped.

In the early 2000s, the then treasurer realised that the federal budget had a massive hole. Up until then, the retirement payouts of the nation’s 150,000 federal public servants had come out of the federal budget.

But each year, these payouts grew and, looking decades ahead, were set to grow exponentially. The Australian government estimated this hole could blow out to hundreds of billions. Provided they did nothing about it.

However, rather than kick the can down the road, the treasurer decided to act.

That treasurer, Peter Costello, announced the establishment of the Future Fund in 2004. Its goal was to fund the superannuation of the federal public service.

The government committed $60.5 billion in May 2006 to get it up and running. And what a stellar run it has had. In 10 years, the Future Fund has grown to over $133 billion.

And the biggest surprise? It has done all this without another cent in contributions from the government.

Employing only the best

To run the Future Fund, the treasurer could have created a whole new department. And in doing so, employ an army of bureaucrats.

But he would have none of that. Instead, he handed the reins to a group of investment professionals. These are some of the best in the game. All up, the Future Fund uses around 116 investment managers from around the world.

Apart from their skill, the key to their success has been their independence. Their job is to generate the best risk-adjusted returns without any interference from the government. It’s this independence that has helped generate such a great run of results.

Plus, there has been one other thing that has helped too. With the extension of the fund’s planned drawdown date, no government has been able to get their paws on the money.

Even with deficits as far as the eye can see.

A stellar set of results

Last week, the Future Fund announced yet another record-beating year. And while he’s been out of politics since 2007, as its chairman, Peter Costello’s connection with the Future Fund remains as strong as ever.

In its annual results, the Future Fund noted that ‘…Returns have exceeded the target benchmark return over each time period since inception adding over $73 billion to the value of the Fund’.

Not only did the Future Fund beat its benchmark this year, it knocked it out of the park. With a target benchmark of 6.4%, the Future Fund generated an annual return of 8.7%. That’s around four times the amount you’ll get on a term deposit.

What’s more, the Future Fund generated this return despite sitting on around $28 billion of cash. That’s over 20% of its total holdings.

Now that might not seem like a massive return if you’re punting on the latest fad. But bear in mind the Future Fund has to find a place to allocate its massive $133 billion of funds.

The other thing about the Future Fund is that it has generated this return with a conservatively structured portfolio.

Not what you expect

If you haven’t taken a look at the Future Fund’s holdings, you might be surprised by what you see. While most superannuation funds invest heavily in bank stocks and the financial sector, the Future Fund does not.

All up, it only has 6% of its total assets — around $8 billion — invested in Aussie shares. In fact, as of 30 June this year, Australian shares accounted for the smallest holding.

So how does the Future Fund generate this level of return…and where does it invest its money? And more importantly, how might a private investor mimic this kind of performance?

Click here to learn how you could potentially piggyback the Future Fund.


Matt Hibbard,
Editor, Total Income

While many investors chase quick fire gains, Matt takes a different view. He is focused on two very clear goals. First: How to generate reliable and consistent income in a low-interest rate world. And second, how you can invest today to build wealth over the next 10–15 years. Matt researches income investments. You can find more of Matt’s work over at Total Income, where he is hunting down the next generation of dividend-paying companies for the future. He is also the editor of Options Trader, where he uses basic options strategies to generate additional streams of income beyond the regular dividend payments. Having worked for himself and with global firms for almost three decades, Matt has traded nearly every asset in existence. But now he is on a very different mission — to help investors generate income irrespective of what the market is doing. It’s about getting companies to pay you a steady, stable income, with minimal stress and the least risk possible. Matt doesn’t believe you have the luxury of being a bull or a bear in the market right now. You have to earn an income from it, regardless of whether stocks are going up or down. By getting the financial markets to pay you an income, you can get to focus on more important things than just money.

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