What Is the Australian Future Fund?
The term Australian Future Fund (AFF) refers to an Australian sovereign wealth fund (SWF) established by the country's federal government. Founded in 2006, the fund's main purpose is to boost the long-term position of the government. The Future Fund, as it is commonly known, is independently managed and generates savings for the Australian government and its people in future years. This investment fund is made up of five special-purpose funds with distinct objectives and investment profiles. The Future Fund's assets under management (AUM) were valued at AUD $163 billion as of Sept. 30, 2020.
- The Australian Future Fund is a sovereign wealth fund that was established by the nation's government in 2006.
- Its purpose is to generate savings for the benefit of the Australian government and its people in future years.
- The fund was valued at AUD $163 billion as of Sept. 30, 2020.
- The AFF draws on the hedge fund world for its organizational structure and investment philosophy.
- Although the fund remains independently managed by external investment managers, the government decides how funds are allocated.
Understanding the Australian Future Fund
The Australian government established the Australian Future Fund in 2006 with about AUD $60 billion from government surpluses as well as shares and proceeds from the privatization of Telstra, an Australian telecommunications company. The AFF was specifically designed, though, to meet future pension obligations of the Australian government. Pension obligations were expected to reach AUD $140 billion by 2020, which would be the earliest point at which draws could be made on the fund.
From the outset, the AFF 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 remains relatively small and resists 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 that 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 applies some cost pressure to the fund as it builds an additional layer of expense into the fund’s model.
While other successful SWFs have the freedom to manage at least part of their own assets, the Australian model proves to be somewhat problematic when market returns are poor. 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.
If you're interested in investing in the Australian market, consider putting your money into a mutual fund, exchange-traded fund, or an American depositary receipt.
Since its founding, the fund launched a series of special-purpose funds. Each of these funds has a different mandate. Although the fund management team is responsible for balancing the risk associated to maximize returns, it does not allocate invested funds or decide which projects each fund supports.
- The Medical Research Future Fund was founded in 2015 to underwrite long-term research and innovation within Australia’s borders.
- The Aboriginal and Torres Strait Islander Land and Sea Future Fund was founded in 2019 to allow the government to make payments to the Indigenous Land Corporation.
- The Future Drought Fund provides drought resilience for the nation's farms and other communities. This fund was launched in 2019.
- The Emergency Response Fund, launched in 2019, is designed to help communities during national disasters.
- The DisabilityCare Australia Fund was established in 2013 to reimburse local authorities for expenses related to the national insurance system.
The Building Australia Fund, the Education Investment Fund, and the Health and Hospitals Fund were launched following the introduction of the Nation-building Funds Act of 2008. These funds were designed to support national infrastructure, education systems, and health infrastructure.
The government repealed the Act in 2019. Both the Building Australia Fund and the Education Investment Fund were closed in 2019 while the Health and Hospitals Fund ended in 2015. The remaining balance of each fund was transferred to a similar fund.