Australia's high-performing Future Fund wants to cut its target to match a low-return world

Ian Waldie/Getty Images

The volatility in equity markets is making it increasingly unlikely that investors can hope for anything more than very low single digit returns this financial year.

The ASX 200 index is today showing a net gain of 1.8% since the start of the financial year, a number which just covers inflation but not much more.

The Future Fund, Australia’s sovereign investment vehicle, shows investment returns of 0.2% for the first nine months of the financial year. This is for a fund which has grown 7.4% a year since it started.

The fund lost $1 billion in value in the March quarter and it has upped its cash holdings — a classic defensive move — to $26.885 billion, or about 22.9% of investments, from the previous level of 20.6%.

The fund has opened talks with the government to lower the return target from the current 5% above inflation. Peter Costello, the former treasurer and now chair of the fund, says the alternative is that the fund would be forced to take on more risk to achieve the target.

Superannuation funds are being hit as well. The median balanced option returned 1.4% in April as the market extended its recovery despite choppy global conditions.

But the financial year-to-date return is at a fragile 1.7%, a long way from the 9.6% in 2015.

The big wealth management companies and other managed funds are also shrinking with the market.

AMP reported wealth management net cash flows down 38% to $209 million in the first quarter. And total assets under management were down 2% to $112.6 billion, the flow on from negative investment market movements.

IOOF today reported the falls in the equity market will mean flat revenue and profits. The size of Funds Under Management, Advice and Administration (FUMA) fell in the March quarter by $1.7 billion to $131 billion.

The market has about six weeks to pick up its performance.

But the federal election campaign will continue right up until the end of the financial year, with the vote on July 2.

Historically election campaigns are a time of uncertainty which have seen weak gains on average for the Australian share market followed by a bounce once the election is out of the way, according to Shane Oliver, head of investment strategy and chief economist at AMP Capital.

“There is anecdotal evidence that uncertainty around elections causes households and businesses to put some spending decisions on hold — the longer the campaign the greater the risk,” he says.

Qantas, the national airline, says the election is weakening travel spending.

Even a positive financial year return is not a certainty, according to analysts at SuperRatings.

“Following the rocky start to the year, investors are now more upbeat, and we have seen that reflected in the current market recovery,” says Jeff Bresnahan, the chairman of SuperRatings.

“But significant downside risks and a lot of uncertainty in the global economy remain. Outside of share markets, global returns on fixed income are low and zero and negative interest rate policies are presenting a real challenge for funds seeking to achieve their risk and return targets.”

This chart shows the slide in returns for a median superannuation fund balanced option returns as at the end of April:

The RBA’s decision to cut the cash rate by 0.25 of a percentage to 1.75% came as a shock to the market with the board worried about inflation.

“We are concerned about the impact lower interest rates will have on pension fund returns, as many retirees rely on fixed interest and cash to offset their income drawdowns,” says Bresnahan.

“While low rates are good for borrowers, savers ultimately bear the cost, and persistently low rates will undoubtedly have a negative impact on the longevity of pension accounts.”

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