What is the Australian Future Fund
The Australian Future Fund is an investment fund that the Australian government established in 2006. The fund is designed to generate savings for the benefit of the Australian government and its people in future years. It is made up of five special purpose funds with distinct objectives and investment profiles.
BREAKING DOWN Australian Future Fund
The Australian Future Fund (AFF) is a sovereign wealth fund (SWF) established in 2006 to invest government budget surpluses and generate national savings. Specifically, the fund was designed to meet future pension obligations of the Australian government. Pension obligations were expected to reach 140 billion Australian dollars by 2020, which would be the earliest point at which draws could be made on the fund. The AFF was launched with contributions of approximately AU$60 billion from government surpluses as well as shares and proceeds from the privatization of the Australian telecommunications authority now known as Telstra.
Since the AFF’s founding, the fund has launched four special-purpose funds which the AFF oversees. The Building Australia Fund and the Education Investment Fund were launched in 2008 to support national infrastructure and education systems, respectively. The DisabilityCare Australia Fund was established in 2013 to reimburse local authorities for expenses related to the national insurance system. In 2015, Australia founded the Medical Research Future Fund to underwrite long-term research and innovation within Australia’s borders.
The Australian Future Fund: Managerial Structure and Style
From the outset, the AFF has adopted an organizational structure and investment philosophy drawn as much from the hedge fund world, specifically the fund-of-funds sector, as from traditional SWF management. The management team has remained relatively small and has resisted the temptation to divide along the lines of asset classes. Instead, fund management treats the portfolio as the domain of the entire management team.
The legislation which founded the AFF mandated that it use external investment managers to execute its investment strategies. This decision was intended to eliminate conflicts of interest among the AFF’s own managers and encourage competition among external advisors. The requirement has applied some cost pressure to the fund as it builds an additional layer of expense into the fund’s model. Other successful SWFs have been granted the freedom to manage at least part of their own assets, and the Australian model has proven somewhat problematic in times of poor market returns. The upside of using external managers is that it allows AFF management to evaluate those managers’ returns and select among the highest performers for future investments.