Inconsistencies abound in Future Fund mandate change: Deloitte

Given its strong performance, the bar for making changes to the Future Fund's mandate should be set very high and Treasury's latest directive does not meet that threshold, Deloitte Access Economics says, adding they raise more questions than they answer.

Last week, Treasury issued the $230 billion Future Fund with a new investment mandate and Statement of Expectations, requiring the sovereign wealth fund to invest with particular regard to Australia's national priorities - the energy transition, residential housing, and infrastructure. In doing so, it retained the same benchmark return and risk profile.

Since its inception in 2006, the Future Fund has generated an average annual return of 7.7% and added more than $165 billion in value.

While our financial institutions should never remain static, Deloitte said, changes must be justified and be made for a specific reason, and "where an institution is, like the Future Fund, performing well, the bar for making changes should be set very high."

Deloitte said it is not clear the changes meet that threshold, saying they raise more questions than they answer.

Until now, Deloitte noted, the Future Fund Board of Guardians has been tasked with determining investment strategy and asset allocation. And, to date, the Future Fund has invested in all the same areas Treasury is asking it to now prioritise.

Deloitte said the directive from Treasury signals the Future Fund becoming less independent despite it being clear the fund should not make such investments at the expense of returns, and questioned why the Future Fund has not invested more in these areas before if it's believed these national priorities can be consistent with maximising returns.

"Equally, if the new investment mandate doesn't change the benchmark risk or return, and doesn't strictly require investment in a specific area - in other words, if it changes nothing - then why was it published?" Deloitte questioned.

The consultant said the size of the superannuation system and global capital markets broadly coupled with a demonstrated track record of success show there is already sufficient funds available to invest in the areas highlighted by Treasury without the need for the Future Fund to "tip in extra."

"Further, in the case of residential property, additional capital is unlikely to do much to lift the number of new dwellings in the short term given that the constraints which are holding back additional development rest largely on the supply side, with high materials costs, a lack of workers, and poor construction sector productivity," Deloitte said.

"Like anyone balancing both risk and return, the Future Fund invests in a portfolio of assets. Not all these investments will earn the requisite return - some will earn more, and some will earn less. The expected return is the average. Does the new investment mandate encourage the Future Fund to adjust its portfolio to incorporate lower-return investments in national priorities, while taking on higher-return (and therefore higher risk) investments elsewhere such that the overall return is maintained?"

Deloitte said these questions demonstrate that, "while keeping economic institutions relevant is a wise and worthy ambition", the specific rationale for the changes "appears elusive."

"Reform should seek to bring change. But the explanations of these reforms - from both the federal government and the Future Fund - have restated that, ultimately, the risk, return, independence, strategy, portfolio and role of the Future Fund will stay the same," Deloitte said.

"That inherent inconsistency is hard to reconcile. Indeed, a better explanation of why the Future Fund requires "refreshing and renewing" would go a long way to building broader consensus for the changes put in place by the federal government."