All Good Things Start With Costello

Peter Costello was the toast of the big end of town last week.

You probably caught a glimpse of him in the press somewhere, grinning from ear to ear.

If you didn’t, here’s what you missed.

Peter Costello 05-09-17
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So why was our longest-standing — and arguably most successful — treasurer looking so happy?

Well, it turns out he’s not so bad at running an investment fund, either.

As you probably know, Peter Costello is the chairman of the Future Fund.

In fact, he was also the original treasurer who announced the establishment of this fund in 2004. It’s been up and running since 2006, and started with around $60 billion of funds to manage.

Today it has around $133.5 billion and could grow to over $200 billion in the next 10 years.

The future fund was set up as the Federal Government’s superannuation fund.

In other words, a way for the government to meet their long term superannuation obligations to federal employees.

Last week Mr Costello announced the fund had smashed its return targets.

And he went further.

Mr Costello said that the investment fund would be able to pay all of the unfunded liabilities of federal public servants. In fact, the fund would still likely have assets for the remainder of this century.

No wonder he looked happy.

It’s a great result for taxpayers too.

They’re the ones who are ultimately on the hook for such costs.

The results for 2016–17 show the $133bn fund returned 8.7 per cent. That’s way better than its target of 6.4%.

This result was even more impressive when you consider that 20% of the investment fund was held in cash.

And I probably don’t have to tell you that term deposit interest rates at the bank are quite pitiful these days.

Future fund to open up to all?

The most intriguing suggestion by Mr Costello wasn’t about its performance, though..

He hinted that in the future, the investment fund may start managing money on behalf of other super funds. Though he did rule out managing individual accounts directly.

The idea would be more like the future fund managing a portion of another super fund’s investments. Presumably this would be for a fee of some sort.

As Costello said, the Future Fund is ‘legally a sovereign fund and, therefore, we cannot mix private monies into it.’

In other words, don’t count on it anytime soon.

Costello’s musings aside, it’s unlikely moves to open up fund access to you or me will come in the short term. Especially as other super funds will be cautious in allowing customers to benefit from what could ultimately be a competitor.

The Future Fund is also set up in a different way to most superannuation funds. It only has one investment option.

Most funds require limits of each type of asset they could own within a certain portfolio. The Future Fund instead targets a benchmark return based on the liabilities it foresees ahead for the Federal Government.

For example, it has 20% in cash right now, but that could increase to 40% if interest rates increase. A normal super fund investment option might not allow such wide variation, unless you switched the investment option yourself from say a moderate fund to a conservative fund.

I’m sure if it did open up a few years down the line, it would have great appeal for a lot of people.

For income focussed retirees, the 7.8% per annum return the fund has averaged since inception looks pretty appealing. Especially when you consider it was formed in 2006, just before the 2007/08 Global Financial Crisis.

Fly away Malcolm, come back Peter

I don’t know how much of this result is down to Peter Costello. But the seeming competence of the fund certainly harks back to the days when you felt Australia had responsible economic leaders in charge.

It doesn’t feel like that at the moment.

Right now, the Australian government seems to be directionless. I’m not a fan of any of the current politicians, to be honest. And I think Malcolm Turnbull is trying his best to get things back on an even keel.

The problem is that the ideological divide within the Liberal party is so great, no one knows where that ‘even’ point is. The next Newspoll result will show you who the primary beneficiary of this is (hint: he’s the member for Maribyrnong).

I’m not getting misty eyed about it.

And I know those times were different — we were in a decade long mining boom. But I’m sure a lot of people would be happy to see someone of the stature of Peter Costello make a political comeback.

Stranger things have happened in Australian politics!

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: Need more income? Our in-house income expert Matt Hibbard has found a way to ‘piggyback’ onto the Future Fund right now. He’s putting the finishes touches on a brand new special report on the topic right now. Keep an eye out for more details on this tomorrow.

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia