Australian Financial Review Thursday 27 May 2021
John Kehoe Economics editor
A potential significant increase in inflation is a risk for financial markets and rising interest rates would make it difficult to generate investment returns, the head of the country’s $179 billion sovereign wealth fund has warned.
Future Fund chief executive Raphael Arndt said if inflation began to rise and governments and central banks failed to unwind their extraordinary stimulus, inflation could run too hot.
To prepare for “fundamentally changed” market conditions, Dr Arndt said the fund would hire more than 150 extra staff to deal with the challenges of COVID-19 and following an extended period of ultra-low interest rates. This included plans to employ another 70 investment staff, almost double the current level of about 80 investment managers.
Since the Future Fund’s inception under the Howard government in 2006, high returns have been made easier by falling global interest rates inflating asset values.
But with trillions of dollars of extraordinary stimulus from central banks and governments flowing through economies and the financial system, Dr Arndt warned the days of easy returns might be coming to an end.
“Policy settings continue to support markets for the time being, but this is priced into assets and unwinding these measures will be a complicated exercise,” he told a Senate hearing in Canberra yesterday. “Equally, a failure to reduce the stimulus at the appropriate time could fuel a significant increase in inflation, a risk markets are already starting to focus on. The ability to generate strong returns into the future is more complex and challenging than ever before given the low level of interest rates around the world.”
The Future Fund’s planned 79 per cent increase in headcount has been approved by the government, which lifted the cap on the fund’s average staffing level to 350.
As well as investment managers, the remaining increase in staff will be in operational roles, including technology, human resources, risk, governance and administration.
The Future Fund was set up by former treasurer Peter Costello to pay for the unfunded pension liabilities of public servants and to strengthen the government’s long-term financial position. Mr Costello now chairs the fund.
Dr Arndt said lower staff levels, now about 196, had served the fund well over the past 15 years when markets were generally stable and asset prices appreciating in the low-interest rate era.
“I’m certainly comfortable that we had enough staff to be successful up until last year – in other words, when markets fundamentally changed because of the COVID pandemic.
“And actually we’ve performed reasonably well through that period.
“But coming out of that experience our job is to maximise long-term performance and look forward a long time on a strategic basis, and our view is that the world is fundamentally changing and financial markets are changing with them. To continue to be successful and to continue to be able to meet what is an increasing challenging investment mandate with interest rates at zero around the world, we needed more staff.”
Dr Arndt was responding to questions from Labor finance spokeswoman Katy Gallagher, who said the Coalition government was generally reluctant to increase staff levels in public service agencies.
Headline inflation in Australia rose 0.6 per cent in the March quarter to be up just 1.1 per cent a year – a key factor in the Reserve Bank projecting it is unlikely to raise interest rates until at least 2024.
