Close the Future Fund already
Once an elegant solution to a real liability, Peter Costello's brainchild is now the problem.
Raphael Arndt, chief executive of the Future Fund, reportedly loves a trip to Disneyland. This seems apropos given the Future Fund's performance is Mickey Mouse.[[Though as we learned last week, courtesy of an Australian Financial Review investigation, the fund's head office is certainly not the happiest place on earth.]]
Whenever uncomfortable questions are asked of the Future Fund's investment performance, its headline return numbers are wheeled out. It has achieved a 10-year average of 8.5 per cent per annum and a five-year return of 9.4 percent per annum. Perfectly respectable-sounding figures. But respectable compared to what?
Over the same 10-year period, the S&P/ASX 200 index delivered 9.4 percent, or 10.6 percent including franking credit benefits. Comparing the Future Fund's returns to one equities index is unfair given its need to diversify.
A better comparison would be Australia's five largest superannuation funds. They delivered between 9.0 and 9.8 percent. The Future Fund, in other words, came in behind the index and behind its domestic peers. But it's even worse than that.
The Future Fund does not pay tax.[[As a sovereign entity, the Future Fund does not pay income tax (as per section 84A of the Future Fund Act 2006). It is also exempt from state and territory taxes such as payroll tax.]] Its peers do. Adjust for a (conservative) 10 per cent tax drag and the Future Fund's effective 10-year return is closer to 7.7 percent.[[Superannuation earnings pay 15 percent tax on most investments while in the accumulation phase. Capital gains on assets held longer than 12 months are taxed at 10 percent. Earnings while in pension phase are nil but are subject to the Transfer Balance Cap which is currently a lifetime $2 million.]] That is not a small gap. That is around two hundred basis points of relative underperformance, which only compounds over time.
