Achieving Investment Excellence

Case Study—Future Fund

LONG-HORIZON FUND, A MASTER IN MANAGING AGENCY ISSUES, WITH FOCUS ON THE WHOLE AND NOT ON THE PARTS

Background

The Australian Government Future Fund is an independently managed sovereign fund founded in 2006, financed with a capital injection of AUD 60 billion by the Australian government.¹ Future Fund had AUD 139 billion (approximately $102 billion) under management at the end of 2017. Its main purpose is to reach AUD 140 billion to meet liabilities for the payment of superannuation to retired public employees.² The benchmark is the Consumer Price Index (CPI) plus a percentage range of 4%–5% in 2017. The fund outsources almost all of the assets to external managers. Future Fund has a clear approach on how to manage the assets. It sees its long horizon as a key ingredient for generating high returns, for three reasons: (i) the ability to take on greater levels of market risk, under the assumption that a long-term investor is able to tolerate the shorter-term losses; (ii) the ability to accept capital being locked up in assets or structures that are costly to sell out of within a short period of time; and (iii) the ability to be countercyclical, patient and opportunistic. External managers execute the implementation of the strategy; this is due to the fund's founding legislation.³

Challenges

Future Fund has been very active in overcoming agency problems. David Neal, managing director of Future Fund, addresses four common agency problems that occur within ...