A Future Fund for All Investors

A couple of months ago I wrote about the Future Fund, particularly looking at some of the lessons that could be learnt for investors.

In the comments under the article, John S made an interesting point. The Future Fund would not go to support the pension of most Australians, and it would be interesting to compare the returns of the Future Fund with superannuation funds that average investors could access.

Brett C made the point that the Future Fund had investments in asset classes like unlisted infrastructure and alternate assets. This makes the comparison even more interesting – does the exposure to less common asset classes create value for the Future Fund over the investments a ‘retail’ investor can access?

That leads to this article – just how well does the returns from the Future Fund compare with the returns that ‘ordinary’ investors can receive?

Comparing Like With Like

The first step in the analysis is to consider the tax treatment of the Future Fund, so that we can compare the returns from the Future Fund with investments with similar tax treatment.

A 2015 Future Fund position paper on ‘Investment Vehicles and Taxation Arrangements’ stated that the Future Fund ‘is exempt from Australian Income tax’ and ‘the Australian tax paid by these companies is recoverable via imputation credit refunds to which the Future Fund is entitled.’

The combination of the Future Fund not paying income tax and having some ability to receive refunds of franking credits suggests that the appropriate benchmark is a superannuation pension fund which has a zero per cent tax rate and receives the refund of franking credits.

Future Fund Returns

Let’s start the comparison by looking at the 1-, 5- and 10-year returns for the Future Fund to the end of December 2022.

The 1-year return was -3.7%

The 5-year return was 7.1% pa

The 10-year return was 9.1% pa

(source: https://www.futurefund.gov.au/en/news-room/Portfolio-update-to-31-December-2022)

It is interesting to note that the Future Fund portfolio shows that the fund benchmarks against a target return of CPI 4 per cent to 5 per cent. Given the high inflation over the 2022 calendar year, the target return was 11.8 per cent, meaning that with a return of -3.7 per cent they missed this by more than 15 percentage points.

This is a useful reminder to include the impact of inflation when considering investment returns, as returns after inflation are what impacts the purchasing power of a portfolio.

Sometimes we become blasé about returns written as percentages. Assuming an initial investment of $100,000 received a return of 9.1 per cent per annum over 10 years, that $100,000 would turn into $239,000.

Now we know the returns we are benchmarking our superannuation pension fund returns against, the question is which asset allocation (growth, defensive, balanced) might be appropriate. The answer will come from the asset allocation of the Future Fund, and at the end of December 2022 exactly 20 per cent of the fund’s balance was invested in cash and debt securities. The balance in invested in a variety of growth asset classes including shares (30 per cent), alternate assets (17 per cent) and private equity (16.9 per cent).

Real World Comparisons

Australian Retirement Trust is the large superannuation fund created from the merger of Q Super and Sunsuper. As a large fund, they provide the first stop to compare the Future Fund performance. It is worth noting at this stage that it is not a comparison of apples with apples – differences including asset allocation mean that this should be seen as an interesting comparison, not one that contains any profoundly important data, and it does not take into account other important measures like portfolio volatility.

The Australian Retirement Trust has a Growth Retirement Fund that targets 85 per cent growth assets. With a slightly higher allocation to growth assets than the Future Fund you might expect a slightly higher long-term returns, and that is what you get. Fund returns, after fees, to the end of December 2022 are -2.2 per cent over one year, 8.58 per cent per annum over five years and 10.54 per cent per annum over 10 years.

The same fund has a Balanced option, with a 70 per cent growth asset allocation target. This is slightly less growth exposure than the Future Fund, and you might expect slightly lower long-term returns, and that is what you get. Fund returns, after fees, to the end of December 2002 are -2.79 per cent over one year, 7.25 per cent per annum over five years and 9.34 per cent per annum over 10 years.

Index-style options provide an interesting comparison because they provide the simple underlying market return. Unfortunately Vanguard, as an index fund manager, doesn’t have a perfect 80 per cent growth fund to match the growth asset allocation of the Future Fund.

Their 90 per cent growth Vanguard High-Growth index fund has a higher weighting to growth assets than the 80 per cent of the Future Fund, and over 10 years provides a slightly higher return of 9.52 per cent per annum after fees, excluding the impact of franking credits. The Future Fund had a return of 9.1 per cent per annum over this same period, with less exposure to growth assets.

The Vanguard Growth Fund has a 70 per cent exposure to growth assets, and a 10-year return of 7.88 per cent per annum excluding the value of franking credits. Across the two Vanguard funds and the Future Fund, the 10-year returns are predicted by the extent of their exposure to growth assets. The 70 per cent Vanguard fund has the lowest 10-year returns, the 80 per cent Future Fund the next highest 10-year returns and the 90 per cent Vanguard fund the highest of the returns. 

Chant West provide some broader benchmarks for returns from all superannuation funds. They find that to the end of December 2022, the average balanced superannuation fund (61 – 80 per cent growth assets) provided investors a return (after fees and taxes) of -4.6 per cent over one year, 5.4 per cent per annum over five years and 7.6 per cent per annum over 10 years. These are superannuation funds, paying tax at the 15 per cent rate. As a rough approximation, a pension fund could be expected to return around an extra 1 per cent of investment returns per year from having a zero per cent tax rate compared to the superannuation accumulation tax rate of 15 per cent - putting the Future Fund ahead in terms of returns, but not by a huge amount. For example, the 10-year approximate return for an average balanced pension fund would be 8.6 per cent per annum, compared with the 9.1 per cent per annum for the Future Fund.

Conclusion

Comparing the returns from the Future Fund with superannuation pension funds accessible to investors is an interesting activity, albeit somewhat imprecise. The Future Fund is clearly a sophisticated investment vehicle, with a carefully thought-out investment policy. However, a disciplined investor who chooses and sticks with a low-cost investment option that is exposed to growth assets will still have had, over the past 10 years, a successful investment experience – one that might be a little behind the Future Fund, but not by much.