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Is it time for another Australian sovereign wealth fund?

April 9th, 2009 · Greg Atkinson · 10 Comments

It seems the Australian government is in the mood to throw money around in order to try and lessen the impact of the recession, but one option that does not seem to have been raised is for the government to establish another sovereign wealth fund. This new fund could act as means of supporting the stock market and provide a source of income over future years to maintain spending on such things as national infrastructure and healthcare.

Australia already has a sizeable sovereign wealth fund namely The Future Fund which was established in 2006 and at the end of 2008 had around AUD $60 billion in assets. This amount included Telstra shares valued at around $7.65 billion so the fund I would imagine has declined in value since December 2008, but nonetheless it is a sizeable amount of money and it was a good move by the former Howard Government to set up such a fund.

So perhaps now with stock prices so depressed it could be time for the Rudd Government to look at setting up another fund so that in years to come the nation will be able to tap into a once again thriving economy once this recession has passed.

As you are probably aware from all the press coverage, some sovereign wealth funds have been fairly active of late in snapping up what they hope will be long term bargains in everything from depressed U.S. financial stocks to mining companies right here in Australia. So if you are interested in what funds are out there then have a look at website of the Sovereign Wealth Fund Institute

Unlike the current Future Fund I would propose the new fund be set up as a way to fund future national projects and/or budget spending and not used as a way to fund future government pension liabilities. The proceeds from this new fund could then be directed into areas such as healthcare, national road works, education etc. as determined by a semi-government authority.

The fund could also act as a type of economic buffer in that it would be built up during the good years but money siphoned off during downturns in order to fund additional government spending without getting the country into massive debt. It is of course too late now for a new fund to help much during this recession but the time might be ideal to set it up ready for the next one.

The new fund could be managed similar to the current Future Fund but in addition, the investment managers would need to ensure that the majority of funds were invested in Australian companies that met certain ethical, environmental and national interest criteria. Perhaps some funds could also be set aside to provide venture capital or specifically for investment into companies involved in the development of renewable energy technology for example.

In addition, there would be scope for this new fund to take strategic stakes in key national assets such as mining companies so that the national interest was protected with hard cash and not only legislation, although I suspect this would be difficult to achieve in practice. (it would simply require too much money)

The fund managers would also be given scope so they could be active buyers in times like now and take stakes in Australian companies that has valuable assets but had seen their share price savaged. I am not suggesting the fund try and put a floor under the stock market; but rather take advantage of bear market conditions and snap up some bargains, as opposed to letting an overseas fund or company be the only ones buying up cheap Australian assets. I would suspect even at this late stage this sort of activity would help put some confidence back into the stock market.

The tricky question is where would the money come from to seed such a fund? Unfortunately any funds that were available have been spent via Rudd’s cash handouts or set aside for massive spending plans, but I am guessing if we checked behind the couch we might find a few billion to at least seed the fund.

Maybe we can trim a little off the spending for pink bats, the painting of schools and catering on the P.M’s VIP jet? Seriously though, I am sure some funds could be found to seed the fund even if it means just spending a little less on the national broadband network. (which I think is another blunder by the way, but more on that in a future post!)

Of course there are many ways the fund could be set up and the mandate given to the fund managers could be very different to the one I have outlined above. But in my view, getting another Australian sovereign wealth fund up and running would give the stock market a shot of confidence and could be in years to come, be a source of much needed funds when the bad times strike once again.


10 responses so far ↓

  • 1 Susan Kishner // Apr 9, 2009 at 3:47 pm

    You know, I have to tell you, I really enjoy this blog and the insight from everyone who participates. I find it to be refreshing and very informative. I wish there were more blogs like it. Anyway, I felt it was about time I posted, I?ve spent most of my time here just lurking and reading, but today for some reason I just felt compelled to say this.

  • 2 Pete // Apr 10, 2009 at 11:29 am

    Thanks Susan, it’s nice to know people read this 🙂

    My question about this article is – do we have any idea of what the size of the future fund is?

    It was being managed by US fund managers…(not Australian ones) and undoubtedly bought US shares too (I assume). The way markets have gone, perhaps that $60B is now more like $30B or less?

    Then we might need to consider: what impact would “selling” of all the Telstra shares have on the economy? Would Telstra suffer? Perhaps the Gov. would need to leave that bit of the fund be. But then the total amount we have is reduced…perhaps only $20B or so?

    It soon becomes a bit of a joke I think, but again I am just speculating here. Personally I am against Sovereign Wealth Funds (SWFs) used to buy or bailout local businesses UNLESS it is to directly counter an offer from an overseas purchaser.

    SWFs should be used to purchase overseas assets and to generate leverage for Australia in these international markets (I don’t mean leverage as credit).

    This is what China is doing, and it’s fantastic for them.

  • 3 Senator13 // Apr 10, 2009 at 7:43 pm

    As at 31 December 2008 the Future Fund was valued at $59.62 billion. This included $7.65 billion worth of Telstra.

    It has a bit over $24 billion in cash and only $4.4 billion in Australian equities.

    It seems to be performing fairly well given the global conditions.

    I think the Future Fund is a good idea. I think it is a smart investment of tax payers money to invest into a fund to finance future liabilities. I would have been a big fan if they created another SWF instead of just cash hand outs. Good article.

  • 4 Greg Atkinson // Apr 10, 2009 at 9:53 pm

    Pete, I would not use the SWF to bailout companies as that would not be included in the mandate given to the investment managers. But I do see sense in having a fund able to snap up stakes in companies in times like these rather than these assets being snapped up by another nation’s SWF. In any case, I would much prefer governments put money in a SWF than throw cash around via tax payer rebates, which is in effect nothing more than vote buying, no matter what side of politics does it.

  • 5 Pete // Apr 13, 2009 at 10:51 pm

    Good points guys. I did understand the basic premise of the Future Fund in the first place, but I did not like how it was invested, and the fact that we used the USA to invest it for us.

    On a semi related note, here is a very interesting article about China’s future economic prospects. I found it a good read:
    http://www.theatlantic.com/doc/200904/chinese-innovation
    (note that it is spread over three pages)

  • 6 Greg Atkinson // Apr 23, 2009 at 9:40 am

    Thanks Pete..that was an interesting article. China is hard to work out because there are a lot of problem just under the surface that could really cause problems. For example I read one report that said the health costs caused by pollution in many major Chinese cities will be crippling in 20-30 years time..so who knows what the true story is?

  • 7 Greg Atkinson // Feb 28, 2011 at 7:39 am

    Some support for another sovereign wealth fund according to an article in the Australia today: “Professor McKibben said Australia should have been generating budget surpluses to direct into a sovereign wealth fund as the terms of trade has surged to record highs. And should have been deregulating the job market to help the economy digest the looming terms of trade reversal.”

    See: Bigger bubble is building, says RBA director Warwick McKibbin

  • 8 Barry L // Apr 29, 2011 at 5:55 am

    Seems like the IMF also believes Australia should have a sovereign wealth fund according to this report by David Uren: Don’t waste the mining boom: IMF – http://www.theaustralian.com.au/business/markets/dont-waste-the-mining-boom-imf/story-e6frg926-1226046573990

  • 9 Senator13 // Apr 29, 2011 at 9:58 pm

    It is interesting looking back at this older post.

    According to the Future Fund website today it is valued at $74.62 billion and this includes $1.63 billion worth of Telstra shares. $8.4 billion of this is now in Australian Equities and $8.0 billion in cash.

    http://www.futurefund.gov.au/

    Over the last 12 months or so I recall seeing articles reporting the Future Fund offloading its Telstra shares on a fairly regular basis. Wonder if this has anything to do with how the Future Fund board view the NBN? Telstra has been in a long term decline and the NBN sure has not changed that trend.

    It is also interesting comparing an investment in the NBN in contrast to that of a SWF. A SWF just seems to me a better way of earning instead of using taxes.

    Greg – Seems your idea of a new fund back in 2009 is still looking good even in 2011. Too bad they were not doing the foundation work back in 2009 to get one set up to face the challenges that are ahead.

  • 10 Greg Atkinson // Apr 30, 2011 at 8:09 am

    Hi Senator. I reckon a new Sovereign Wealth Fund (SWR) would have been a better place to invest than pink batts that’s for sure. For me the big advantage is you take money away from the government and prevent them for using it as a re-election slush fund which is often what a lot of economic stimulus spending really is anyway.

    Then in the years ahead you have income which you can then use to fund infrastructure projects on a long term and continual basis where dare I say it, a cost benefit analysis has be done before money is thrown at the project as has happened with the NBN.

    In addition the government could take small stakes in start up technology companies for example to help give the sector a lift and help diversify our economy.

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