Future Fund chair warns of risks to SWFs from rising populism

Peter Costello said partnerships with local investors, but also greater transparency on the part of sovereign funds is the way forward.

Future Fund chairman Peter Costello warned that rising populism and foreign investment restrictions could make it more difficult for sovereign wealth funds to undertake solo investments.

Speaking at the Australian Financial Review Business Summit in Sydney earlier this week, Costello said that if offshore investment for sovereign wealth funds becomes more difficult as a result of government policies, “of course it will affect” the Future Fund.

He argued that partnerships with local investors would become the norm as this can help convince foreign governments that sovereign wealth funds are “not an arm of state policy”.

“China Investment Corporation, for example has been a very good international investor, [and it] has invested in Australia in partnerships – and I think that’s probably the way sovereign wealth funds will invest, in consortia and in partnerships. Future Fund is in a consortium that up until recently had a very big position in Gatwick Airport,” he said.

“I think that’s the way to do it, but I would also say, to the extent that SWFs become more transparent, they open their books and say where they’re investing and what their returns are … the more liberty they’ll have.”

The Australian government has become notably warier of Chinese investment in recent years, with the Foreign Investment Review Board blocking bids for New South Wales electricity distributor Ausgrid in 2016 and east coast gas pipeline giant APA Group in 2018. It is also one of several countries to block Huawei from participating in the development of its 5G network.

On the risks faced by international investors by geopolitical developments, Costello said: “I don’t know if I’d say the risks are increasing, but they’re changing.”

He added, though, that investors have lived through an “exceptional time” in recent years with regards to monetary policy, leading to high asset prices which in turn has prompted the Future Fund to reduce its exposure to equities and real assets in favour of a higher cash allocation.

“We have lived through the easiest monetary conditions, probably in centuries, where central banks have pumped up the money supply and accordingly asset prices have risen to peaks,” he said.

“If you think that can be continued, you’d probably be a buyer. If you think that there’s got to be some normalisation in relation to asset prices, you’d probably be taking a bit of money off the table and holding it in cash.

“We have quite a big cash allocation at the moment, because we look around the world and see asset prices fully priced in, in equity markets, infrastructure markets, property markets – and so we just think it’s time to take a little bit off the table.”

Costello was appointed chairman of the Future Fund in early 2014. Prior to that he was a member of Parliament and was Australia’s longest-serving treasurer, a role he held from 1996 to 2007 under Prime Minister John Howard.

Future Fund last year began preparations to sell around A$5 billion ($3.5 billion; €3.1 billion) of “illiquid assets”, according to a February 2019 portfolio update, which includes both infrastructure and property assets.

The fund’s allocation to infrastructure and timberland stood at A$12.5 billion as at 31 December 2018, up from A$10.8 billion on 31 December 2017, with the increase attributed to a weak Australian dollar and increased valuations.

Future Fund is part of a consortium led by Global Infrastructure Partners that sold down its majority stake in Gatwick Airport late last year, ceding majority control to Vinci Airports.