The share market had soared into record territory in the two years since the Future Fund’s establishment was announced in 2005. Raphael Arndt, who had joined the Fund from infrastructure manager Hastings, says former colleagues were warning him that the Fund had missed its chance to build an infrastructure portfolio now that prices were hitting new records.

“There was this huge pressure to invest,” says Arndt, “and the Board had already decided to transition some proportion of the Fund, which was sitting in cash, literally on overnight deposit with the RBA. A fax would come every morning saying this is how much interest you earned last night. It was a lot.” 

The Fund had already amassed $52 billion in assets by 30 June 2007, thanks to Government allocations from Budget surpluses and its recent Telstra sale.22 The majority was still held in cash, but it was now building a fledgling equity portfolio. Just $1.85 billion and $2 billion23 had been awarded to State Street and Vanguard in passive equity mandates. 

This represented just the tip of a more ambitious investment plan: 60–65% of the portfolio would be allocated to listed equities by June 2008. But there were signs that all was not right with the market as the equity price build-up continued through the months ahead. 

Major US subprime mortgage lender, New Century Financial, filed for bankruptcy in April 200724 and in August, BNP Paribas froze three funds that had packaged sub-prime loans into collateralised debt obligations (CDOs).25 In August, British bank Northern Rock was forced to turn to the government for support. Scenes of nervous depositors lining up to withdraw their savings – a classic ‘bank run’ – hadn’t been seen in the UK for 150 years.26 

An international alliance 

The Future Fund played a key role in forging an alliance of sovereign wealth funds just as the GFC threatened their role as global investors. 

“The US Congress had started to become concerned about sovereign wealth funds investing in domestic assets,” Murray says. “Of course, the consequence of this could be a government, particularly the US, banning sovereign wealth funds from commercial investments in their country and that could spread through retaliation by other countries.” 

The International Monetary Fund (IMF) convened the International Working Group of Sovereign Wealth Funds (subsequently becoming the International Forum of Sovereign Wealth Funds) which developed the Generally Accepted Principles and Practices – the Santiago Principles– for sovereign wealth funds to adopt. Murray led the group as inaugural Chair. 

Healesville VIC, Australia
Murray says no other sovereign wealth fund among the original 26 members had such a clear objective as the Future Fund’s goal to outperform inflation by 4.5–5.5% over the long term.