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Finance and Public Administration Legislation Committee
23/05/2018
Estimates
FINANCE PORTFOLIO
Future Fund Management Agency

Future Fund Management Agency

CHAIR: The committee will now resume. I welcome Mr David Neal, chief executive officer of the Future Fund Management Agency, and officers from the Department of Finance, covering program 2.8, 'Australian government investment funds'. Mr Neal, do you wish to make an opening statement?

Mr Neal : I do. In April, we released our regular update on the performance and positioning of the five funds for which the board is responsible. I'll provide a short summary of those key points. The Future Fund continues to make good progress in pursuit of its objective to strengthen the government's long-term financial position. The fund now stands at $141 billion, with investment returns adding over $80 billion to the original contributions. At 31 March 2018, the fund generated return of 8.5 per cent per annum over the last 10 years, exceeding its target benchmark return of 6.7 per cent per annum. Indeed in our public release we reported that the fund exceeded its target return over all time periods to 31 March. At the end of March, the Medical Research Future Fund stood at just over $7 billion. The fund is performing in line with its mandate and we continue to diversify its portfolio. The DisabilityCare Australia Fund stood at $10.4 billion at the end of March. The two nation-building funds, the Education Investment Fund and Building Australia Fund, each stood at $3.8 billion. We continue to invest these funds in accordance with their low-risk mandates.

In summary, the Future Fund Board of Guardians invests $166 billion across the five public asset funds for the benefit of future generations of Australians. We're progressing a number of organisational priorities to sustain our success into the future. This includes a focus on improving technology, productivity and efficiency, and developing our team, recognising that the collective capability of our staff will always be at the heart of our success. Together, these priorities will help us respond to the growth in the number and value of funds we are responsible for, growing competition for attracting investment opportunities, and the power of data to better manage and analyse opportunities and enhance risk management. To support this work, we've made some changes to our structure. The changes announced in March 2018 further strengthen our investment, technology and risk functions as the organisation matures and goes into its second decade. While there is a lot of work underway to position our organisation for the future, our team remains sharply focused on its investment objective. I welcome your questions.

CHAIR: Thank you, Mr Neal.

Senator KIM CARR: Thank you very much, Mr Neal. I'm interested in particularly the EIF fund. The $3.8 billion figure is the balance in the account. When was that last updated?

Mr Neal : That was at the end of March.

Senator KIM CARR: What's the rate of growth on those funds been over the last few years—say, since 2013?

Mr Neal : I'd have to take it on notice to get the exact number.

Senator KIM CARR: Could you give me your indication at this point?

Mr Neal : Those funds are given a bank-bills-plus-30-bases-points mandate, so they're low-risk, invested in cash and slightly higher risk investments. It will be low, in the order of three per cent per annum—that sort of number. Perhaps 2½ per cent or three per cent.

Senator KIM CARR: Perhaps you could take the detail of that question on notice.

Mr Neal : Certainly.

Senator KIM CARR: Thank you. If the government wished to withdraw from the building funds, what are the budget rules that apply?

Mr Neal : That's probably a question for my colleague.

Dr Helgeby : That's a question really for the department. There is legislation before the parliament to close the EIF and other funds. I might draw your attention to the Department of Finance portfolio budget statements. We are at page 34.

Senator KIM CARR: I've got that. I see that there.

Dr Helgeby : Those numbers reflect the government's intention to close the EIF and also the BAF, which is on the previous page, and to transfer those funds to support the NDIS.

Senator KIM CARR: That's good. Thank you very much. It remains the government's intention—

Senator Cormann: That remains government policy.

Senator KIM CARR: Thank you. It's to support the NDIS?

Dr Helgeby : The NDIS.

Senator KIM CARR: I see. I'm wondering if you could assist me. The other measures that were to support the NDIS—for instance, the Medicare levy—

Senator Cormann: That's a Treasury matter because—

Senator KIM CARR: I understand it's a Treasury matter. I'm not disputing that it's a Treasury matter. I'm interested that the Treasurer announced that that matter wasn't going to proceed because funding had been found from other sources for the NDIS. Why has this matter been maintained as government policy?

Senator Cormann: Because it's still required.

Senator KIM CARR: How does that work?

Senator Cormann: The decision in relation to the Medicare levy was made in the context, of course, of all the other decisions that remain in place and all of the information that is reflected in the budget when it comes to economic and other relevant parameters. Obviously the decision made that we were in a position to fully fund the NDIS without proceeding with a further increase in the Medicare levy on top of the increase that Labor legislated of course has an inbuilt assumption that the government proceeds with this particular policy measure, which has been in the budget for some time.

Senator KIM CARR: I see. What's the assumption about the—

Senator Cormann: The assumption is as I just said—that we continue to proceed with that aspect of the plan to fully fund the NDIS.

Senator KIM CARR: The measure has been on the Notice Paper for how many years now?

Senator Cormann: I'll have to take that on notice.

Senator KIM CARR: You'd know that, wouldn't you, Dr Helgeby?

Dr Helgeby : The legislation has been before the parliament for a while. I think it's currently before the Senate.

Senator KIM CARR: When you say 'currently before the Senate', you mean it's on the Notice Paper?

Senator Cormann: That is not unusual. I remember Nicola Roxon as health minister bringing various measures back over a number of years. The Australian people get an opportunity to have their say. Obviously, we will seek to win the trust and confidence of a majority of people in a majority of seats at the next election. Hopefully, they give us a Senate in which more senators support the implementation of the government's agenda.

Senator KIM CARR: Yes. This measure was originally brought before the Senate to fund privatisation of roads and other matters, wasn't it? Asset recycling was the original rationale for the abolition of this fund?

Senator Cormann: If you want me to go through the history of it all, I'm happy to provide that on notice.

Senator KIM CARR: But I'm just indicating that that was the case, wasn't it? And the Senate rejected that measure.

Senator Cormann: We have put forward various budget measures at various times, many of which have been successful through the Senate, some of which have not, some of which we have adjusted and some of which we have maintained. This measure is now a part of our plan to ensure that the NDIS is fully funded over the medium to long term.

Senator KIM CARR: So it is a measure that has been rejected by the Senate?

Senator Cormann: In a different context and we are pursuing it in this context.

Senator KIM CARR: When was it last rejected by the Senate?

Senator Cormann: That's a matter of public record, but I'm happy to check that for you on notice.

Senator KIM CARR: Thank you. When is it your intention to actually bring it before the chamber, as distinct from keeping it on the Notice Paper as a zombie measure?

Senator Cormann: I reject your characterisation, the way you describe it. It is currently an unlegislated measure. We will put it forward as part of the government's program in the Senate at the appropriate time.

Senator KIM CARR: When is that likely to be?

Senator Cormann: At the appropriate time.

Senator KIM CARR: But it's not on the current legislative program for parliamentary consideration, is it?

Senator Cormann: Well, it is on the program because it's on the Notice Paper. The government's program is reflected in the Notice Paper. In terms of when specifically it will come on, as with all legislation, it will come on at the appropriate time.

Senator KIM CARR: Let me clear about this. This matter was taken off the Notice Paper when the parliament was prorogued. Is that the case?

Senator Cormann: It wasn't taken off the Notice Paper. Obviously, when the parliament is prorogued certain automatic processes happen and, of course, decisions after the parliament comes back are made by the government to ensure that all of the relevant legislation is reissued on the Notice Paper.

Senator KIM CARR: So it was part of that process. All the legislation at that point was removed from the Notice Paper

Senator Cormann: But it wasn't a decision of government to remove legislation, it was the effect of proroguing, in the usual way, under our parliamentary processes.

Senator KIM CARR: Sure. So it has now been restored to the Notice Paper as part of a resolution of the Senate, has it?

Senator Cormann: We remain committed to this measure and we will pursue it through the parliament, including through the Senate at the proper time.

Senator KIM CARR: Thank you. I understand what the government's position is, but I just want to know what its current status is. You're saying that it's a matter that is on the Notice Paper. Is that the case?

CHAIR: I don't wish to intervene too much, but I think we're straying quite a long way from the Future Fund Management Agency.

Senator KIM CARR: But it's a fairly important issue. Is the government's policy—

CHAIR: I'm not—

Senator Cormann: You were making the point that it was on the Notice Paper.

Senator KIM CARR: I'm interested in knowing—

Senator Cormann: To be honest, I haven't looked at the Notice Paper.

Senator KIM CARR: I would just like to know: what is the status of this legislation, as detailed on page 34 of the PBS?

Senator Cormann: The status of the legislation is that the government remains committed to it, and we will pursue it at the appropriate time.

Senator KIM CARR: Yes. Now, I'm asking the officials: has this matter being restored to the Notice Paper?

Senator Cormann: The officials are not responsible for that, the government is responsible for that.

Senator KIM CARR: They can tell me if it's the case. Has it been restored to the Notice Paper?

Senator Cormann: The government will pursue this legislation at the appropriate time, as is our prerogative.

Senator KIM CARR: Well, I'm asking: has this matter been restored to the Notice Paper?

Senator Cormann: Well, the government will pursue this legislation at the appropriate time. The Notice Paper is not a matter for officers of the department. The chair is quite right: this is actually not in any way related to the Future Fund.

Senator KIM CARR: So you can't tell me whether or not it's been restored to the Notice Paper?

Senator Cormann: I haven't got the Notice Paper in front of me right now. That is certainly accurate. But the Notice Paper is a matter of public record. What I can say to you is that the government remains committed to this measure as an important part of fully funding the NDIS, and we will pursue it at the appropriate time, as we pursue all of the measures contained in the budget at the appropriate time.

Senator KIM CARR: Thank you.

Senator Cormann: Obviously, there are sequencing arrangements and we prioritise, including based on what is most likely to successfully pass the Senate at that point in time.

Senator KIM CARR: But I'm just wondering whether or not the actions you're asserting on page 34 have actually got to the point where you've restored them to the Notice Paper.

Senator Cormann: I think that you have a serious misapprehension here about what budget papers actually represent. The budget papers represent—

Senator KIM CARR: Unlike the public!

Senator Cormann: I will tell you what the budget papers are. The budget papers are a reflection of policy decisions of government. Obviously, they're the government's plan for the funding of government services and benefits and the like. But, of course, it is a collection of government decisions. It's not a collection of acts of parliament.

That is precisely the same arrangement as it was under your government. Then health minister Roxon had in her budget papers, including her before-budget papers, for a very long time, various attacks on private health insurance that were not able to be legislated for a very long time. The government of the time kept holding them up and they remained in the budget papers for the whole period as a reflection of government policy at the time. That is the normal approach to these things. Budget papers reflect policy decisions of the government, and, of course, the government implements those decisions in the appropriate way.

Senator KIM CARR: Mr Neal, is it the case that these funds cannot be spent for any purposes other than those specified in the act that governs the fund? It can't be done without a parliamentary instrument?

Mr Neal : Again, our role is to invest the portfolio. The use of the money is a question for the department again.

Senator KIM CARR: Can the department tell me that?

Dr Helgeby : Well—

Senator Cormann: Until such time as the legislation is changed, obviously, the disbursements out of those relevant funds are governed by their governing legislation. But the government has made a decision not to make further disbursements, given that we have decided to redirect those funds for another purpose, namely, to fully fund the NDIS over the medium and long term.

Senator KIM CARR: But that can't be done until the legislation is actually carried by the parliament.

Senator Cormann: That is right, yes.

Senator KIM CARR: So the current act governing the fund is still in operation?

Senator Cormann: Yes.

Senator KIM CARR: And that act specifies that these funds are to be used for what purpose?

Senator Cormann: That is actually a matter for the education department because that is an act that comes under their portfolio; it doesn't come under the Finance portfolio.

Senator KIM CARR: It certainly can't be used for the National Disability Insurance Scheme—

Senator Cormann: Well, not until such time as the—

Senator KIM CARR: or any other fund outside education.

Senator Cormann: This is the usual process: not until such time as the parliament has legislated what the government has put forward as a policy reform.

Senator KIM CARR: Thank you very much. I think that covers it.

Senator Cormann: Just to confirm: one of our hardworking officers has now checked, and on page 10 of the Notice Paper the relevant legislation is listed as being adjourned in the Senate.

Senator KIM CARR: Thank you.

Senator STOKER: Mr Neal, I've got some questions about the transfer of the management of the land account to the Future Fund Management Agency. Can you outline the required investment settings and constraints that apply to the land account?

Mr Neal : No, because—

Senator STOKER: Can someone?

Mr Neal : the way that the legislation, the bill, envisages that this will work is in the same way as the other funds that we look after. The responsible ministers, the finance minister and the Treasurer, give an investment mandate to the board. Until there is an act, there is no investment mandate, so we await with interest what that will be.

Senator STOKER: Looking back to the 2014-15 year arrangements for the land account, what return was that account achieving during that period?

Dr Helgeby : I'm not sure that's a question that the Future Fund can answer. The existing land account is administered by the Department of the Prime Minister and Cabinet, and it's been operating under a benchmark that has been set by that department. My understanding is that, in 2014-15, its return on investment was about 3.6 per cent. Largely speaking, it has been invested in cash-like investments and has really been constrained to that. The move into a new fund is to allow it to earn at a greater rate of interest by enabling it to invest in a different way through the Future Fund.

Senator STOKER: What was the benchmark set for the land account to target during that 2014-15 year?

Dr Helgeby : The benchmark return in that year would have been 4.3 per cent, but the benchmark has been around CPI plus about 2.6 per cent.

Senator STOKER: In your view, were those benchmarks achievable in the context of the constraints that apply in the nature of how it's being managed under the 2014-15 arrangements?

Dr Helgeby : I'm not aware of any year in recent times when the existing land fund has been able to achieve the benchmark. It has always been under the benchmark that was set for it, and I think that is an indicator of the nature of the investments that were undertaken.

Senator STOKER: Are you able to tell me a little bit more about how the investment mandate would be set for the proposed Aboriginal and Torres Strait Islander land and sea account?

Dr Helgeby : With an investment mandate for an investment fund, there is a standard process. There are two key ministers in this particular case who need to agree on an investment mandate. That investment mandate is made by them—in this case it's the Minister for Finance and the Treasurer—and it is set for the board to operate with and under. The board, clearly, is consulted in the process, as are other people—for example the Department of the Prime Minister and Cabinet—consulted in the process of setting the mandate. A mandate can only be set once the legislation has passed. It's a mandate for something that has to exist. In this particular case, the process is that there's legislation before the parliament at the moment. There's been a committee report. Should that legislation pass, then a mandate will be set in due course.

Senator STOKER: When target returns are settled upon, are those targets of Future Fund fees met or not?

Dr Helgeby : Normally met.

Senator STOKER: In your view, will the FFMA be able to guarantee the sustainability of the land account going into the future?

Dr Helgeby : That's really the crux of how an investment mandate is set. It has to take into account its sustainability in the very long term but also take into account the cash flows that need to come from the account in order to sustain the activities that it's there to fund. Setting a mandate therefore requires you to judge those things but also—and this is perhaps the most important thing—to judge the level of risk which is acceptable. In any investment mandate, it's important to realise that not only can a benchmark not be hit but, in certain circumstances, there's potential for a loss. So setting a set of risk parameters is really about determining an acceptable risk and an acceptable level of short-term loss, given the purpose being a long-term purpose. All of these things are balanced up.

Senator STOKER: And they're balanced up with the purpose of ensuring that sustainability?

Dr Helgeby : That's right. I'll just add: if you look at any of the funds that the Future Fund currently manages or has managed in the past, all of them have had an individual mandate set for them, taking into account what that fund is for.

Senator STOKER: Thank you.

Senator McALLISTER: Mr Neal, a number of organisational changes have been announced. I just wondered if you could explain to the committee what the drivers for that change were.

Mr Neal : Certainly. The organisation has obviously matured considerably over its first decade. It had to grow from nothing and build an investment team and a broader team to implement the portfolio. The portfolio has grown. The number of funds that we're responsible for has grown. So we arrived at a point where we felt there was an opportunity to reconsider the structure of the organisation to make it most likely to be successful into the future and in particular over the next decade.

One of the influences on that was that the government has announced its intention not to draw down funds until 2026-27. That means the portfolio will continue to grow and become considerably larger than it is now. Again, that increases the challenge on the organisation.

So we looked at the things we needed to do to sustain the strength, and there really were three things, three changes that we made. I changed the way that the investment team was organised and in particular brought it together under a single head, under the chief investment officer. Prior to that, I had two investment reports to me.

Senator McALLISTER: That was the chief investment strategist?

Mr Neal : That's right.

Senator McALLISTER: And what was the other?

Mr Neal : The chief investment officer.

Senator McALLISTER: What distinct roles were they previously playing?

Mr Neal : The chief investment officer was responsible for all of the investments in our portfolio, if you like—so the people who ran listed equities, private equity, property, infrastructure and so on. Those people who were running those portfolios reported to the chief investment officer. And then separately we had a chief investment strategist who ran the team that thinks about the investment environment and the risks in the broader investment environment, the economic analysis, capital markets analysis and those sorts of things. And then those two groups came together at our investment committee to make decisions together about the portfolio.

As life got more complex and the portfolio got larger, it made sense to integrate those two functions under a single leader to make sure they were as joined up as possible. That's one of the things that we work hard at. So that was one change. I think that will allow us to get more efficiency, effectiveness and productivity and better decisions out of the investment team.

The other thing that we've been thinking very hard about is risk management. It's very topical across the financial services industry at the moment—how to organise yourself to manage risks as effectively as possible. As the organisation had matured, it was time for us to have a defined role, a chief risk officer role. There were some minor structural changes involved, revolving some of our risk management professionals to report in to a chief risk officer.

Senator McALLISTER: And that person will sit on the executive team?

Mr Neal : I combined the chief risk officer with the general counsel role. The general counsel was already on the executive committee, so he's still in that role, but he's taking on the additional responsibilities of making sure that we have an effectively functioning risk management.

Senator McALLISTER: Does he have any experience in that? I'm curious about choosing the general counsel to take that on.

Mr Neal : It's a very good question. The first observation I'd make is that I think that, if you've had a career in law, you've very much had a career in risk management. I think that understanding risks and balancing risks are something that you do. You also, I think, have a natural inclination towards creating the right sorts of frameworks, being very clear about who's accountable for what.

What I should be very clear on is that the chief risk officer is not responsible for deciding on our investment risks. That's the investment team, and we need to be really clear on that. The people making the investment decisions have to be accountable for the investment risks. What our chief risk officer does is make sure that we have the frameworks in place to understand those risks, both investment and operational risks, to report on those risks and to check compliance with the various risk policies that we have.

In the industry it's regarded as a second line of defence. The first line, the people who are accountable for the risk, are the people who are actually executing on the business, and the chief risk officer runs the second line, which supports that activity and checks on that activity.

Senator McALLISTER: Mr Neal, you know your business better than I do, but I would have thought that the investment risks were a subset of the risks faced by the fund. Most organisations would identify a range of other categories of risk. When you say 'a second line of defence', you're not suggesting that the focus of the chief risk officer is only on investment risk, are you?

Mr Neal : No, not at all. I was using that as an example. It's both investment and operational, all risks that we are exposed to through our work. The chief risk officer is responsible for ensuring that we have frameworks in place to manage those risks—to understand those risks, identify those risks and manage those risks—and that the frameworks and the policies and system of accountabilities that we have in place are fit for purpose.

Senator McALLISTER: What's been the role of the board in reviewing or approving the risk management framework?

Mr Neal : The board has an audit and risk committee, which reviews and approves exactly that—our risk management framework and the key risk policies that govern the way that risk management occurs in the organisation.

Senator McALLISTER: You mentioned somewhat obliquely at the start of this conversation that the finance sector is thinking carefully about risk at the moment. What did you mean?

Mr Neal : Only that it's been shown the number of weaknesses in the way that organisations have been conducting risk management. That will always be the case. No organisation is perfect. But, to take one example, I think the APRA prudential inquiry report on the CBA is interesting reading for all of us running financial services businesses. It provides a nice agenda for an audit and risk committee meeting, perhaps, to think about: 'All those points were raised. How do we stack up against all those points? What can we learn from that?' The important thing is to be continually looking for new opportunities to learn and develop the quality of the organisation.

Senator McALLISTER: What is the organisational response to this very public conversation going on about approaches to risk in the financial sector?

Mr Neal : I'd like to think we're a little ahead of it, in the sense that we'd already made some changes to our risk management framework, including a structural change. I think that signals that we need to be constantly thinking about and evolving and improving the way risk management is organised within the future. That would be the first thing. The second thing, as I said, is the response is to take the stimulus that comes from that inquiry and add it to the general approach that we have, which is to be engaging with peers and other, best-practice, organisations around the world and to be learning from them. I imagine that we will learn from the inquiry. A number of us have read the prudential report. It forms a series of discussions and work streams within our organisation to see whether there is something that we can improve as a result of what we've read.

Senator McALLISTER: In asking this question, I'm trying to understand whether you have tasked anybody in the organisation with a specific piece of work to respond to this set of issues—including the example you provided, the APRA report—or whether it is just part of the background to your ordinary activity.

Mr Neal : I think it's closer to the latter. There's nothing that's come up where we've said, 'Oh gosh!' and suddenly realised we have to do something very different and I've set up a task force to work on something. That is not the case. I think it is more about continuing to learn and evolve. One of the central elements running through the broader industry conversation is around the importance of accountability and clear accountability. That is something that we've been working on for a while and trying to make clearer and clearer to everybody in the organisation exactly what it is that they are accountable for and how we will hold them to account for that. That's something we have been working on, and I think this adds strength to that desire. Hopefully that answers the question.

Senator McALLISTER: You said that it would make a very good agenda for a risk and audit committee. Is it on the agenda for the next risk and audit committee? Has it been on the agenda for any recent meetings?

Mr Neal : Our next audit and risk committee meeting is in July, and we are going to propose that this does form an agenda item.

Senator McALLISTER: I interrupted you: you were stepping through three major changes and we got stuck at No. 2.

Mr Neal : We did. The third point is around technology. Technology is changing very rapidly, as we would all be very much aware. When you think about the investment business, it is very much about turning data into insights. It's about gathering information and making decisions on that. Technology has a huge role to play in making that more effective: in accessing data and then in analysing that data to help make decisions. We've been putting a lot of work into that, and I formed a view that the organisation needed a chief technology officer to elevate the input into the way our business is managed that comes from technology. It's not just about providing nice laptops and a secure environment. It is about thinking about how technology can make us much more efficient and perhaps even re-invent the way that we do our jobs to make us better, to improve risk management and to improve the quality of our decision-making. I wanted to elevate that role of technology within the organisation, hence the creation of that role.

Senator McALLISTER: That person will sit on the executive committee also?

Mr Neal : Correct.

Senator McALLISTER: Just back to your first initiative around the question of the chief investment officer, will the head of portfolio strategy report to that person?

Mr Neal : They will.

Senator McALLISTER: In terms of recruitment for these roles, you've already indicated that general counsel is taking on the chief risk officer function. Did you give any thought to conducting an open recruitment for the new role with the broader mandate?

Mr Neal : We did. For all of the roles that were created or amended, we did consider that. There was a panel formed within the organisation to think about these things. We felt that we had very strong internal candidates and that the best interest of the organisation was for us to promote from internally, so to consider the internal candidates given that we had a very strong bench, and to provide the internal candidates with those roles where we could. There were some cases where we couldn't. The head of portfolio strategy was one where we felt we should do an external search.

Senator McALLISTER: Has that been filled now, the head of portfolio strategy position?

Mr Neal : No. The head of portfolio strategy and the chief technology officer roles are both outstanding searches.

Senator McALLISTER: What is the process to fill them?

Mr Neal : With the chief technology officer, we're using an external recruitment firm and doing a local and global search to look for the best candidate we can find. We haven't commenced the search for the head of portfolio strategy yet. The chief investment officer felt that he wanted to spend some time understanding that area better, given that it hadn't previously reported to him, before he commenced the search so that he knew exactly what it was that he was looking for. So that search hasn't started.

Senator McALLISTER: And the person who was previously the strategist, has that person left the organisation?

Mr Neal : He has.

Senator McALLISTER: You mentioned earlier that a panel had been formed to consider the process for filling these vacancies. Who's on the panel?

Mr Neal : The chief investment officer, the chief culture officer and myself.

Senator McALLISTER: And does that panel have a continuing role in the actual recruitment? It determined the strategy for recruitment, but is it now also conducting recruitment for these vacant positions?

Mr Neal : The chief culture officer and I are leading the recruitment of the chief technology officer. We are still in the very early stages, but once we have a short list then we will get others involved. As I mentioned, we haven't started that process for the other role yet.

Senator McALLISTER: You released a portfolio update on 23 April. I understand it covers the period to 31 March. Last time you appeared we talked about the fact that investment return had lowered but you hadn't adjusted your portfolio. It now appears you are shifting your portfolio towards equities rather than cash. Is that a correct reading of the update?

Mr Neal : It is, yes.

Senator McALLISTER: How does that interact with the volatility in those markets over the last 12 months? How does that decision respond to those circumstances?

Mr Neal : The decision to increase the risk level in the portfolio—by a relatively small amount, I should say—reflects a view that many of the risks that we'd been concerned about had dissipated. The global economy had gone onto a pretty sound footing—there was a synchronised growth across the globe that was allowing, for example, the Federal Reserve to start slowly increasing interest rates; earnings growth and broader cashflow growth for investments were continuing to look strong—and so with some of those risks that we had been worried about having dissipated, it was appropriate to put a little more risk into the portfolio.

Senator McALLISTER: The previous update was issued—they're issued every quarter. Has there been a significant change to the value of the portfolio as a response to the changing strategy?

Mr Neal : Obviously the change in the strategy influences the returns that we receive over a relatively short period. Over that period I don't know that the return that we got as a result of that changing strategy has been materially different to what it would have been had we not changed the strategies. These changes are not intended to play out over a quarter or six months; they are set for longer periods than that.

Senator McALLISTER: Sure. That's something that you essentially actioned after the December report was issued? It's been changing over time.

Mr Neal : There was a series of changes. The investment committee meets every two weeks or so. We can make changes as we see fit, as we respond not only to what's going on in the broader world but as the opportunities come through from the investment activity and from our investment managers. So it tends to be a series of more incremental moves, rather than a decision to put a very large change through. It's a bit more gradual than

Senator McALLISTER: The last time you and I spoke in an estimates context in October we talked a bit about venture capital. I think at that time your assessment was that Australian venture capital wasn't generating particularly good returns, but possibly change was under way. I note the sort of media reports that you've now placed an investment with Blackbird Ventures. Is that a signal that the fund has more confidence in Australian venture capital?

Mr Neal : I think it's really consistent with the comments I made in October that we hadn't made that decision at that time. Obviously we were looking very closely at the new generation of venture capital managers in Australia. The reason I said I thought there were reasons for being optimistic was that we were seeing things that we thought were different to the past and were an improvement. So I think it's really a continuation of that story. Yes, we believe there are some global-grade institutions that are developing in Australia, and that gives us reason to be optimistic. We found one that we believe is at that level at this point and we continue to look at the market and will continue to do so.

Senator McALLISTER: At the time of the October estimates I think you provided an indication of how much of the portfolio is invested in venture capital. I think you said $2 billion at that time. I'm interested in what the current number is. Because the Sydney Morning Herald on 2 April wrote:

The national sovereign wealth fund, which is chaired by former treasurer Peter Costello, has one of the world’s most active venture investing programs, with $5 billion deployed into offshore funds and in direct stakes in start-ups.

Mr Neal : We are a victim here of different people defining things in different ways. There is obviously a progression in the life of a new business. It starts off at a very, very early stage where it's really just an idea and a person. Then it grows as that idea starts to appear as though it' s likely to have commercial success but isn't yet making any money—it's in that venture stage. As it starts to grow its top line and starts to win customers, it transitions at some point from being what people would call venture to what people would call early-stage growth. Different people will draw the line in different places. We have a fairly large portfolio of what we would typically call early-stage growth, but it does often get described as venture as shorthand. We have a large portfolio of that, particularly in the US. That's bringing in a slightly different phase of the stage of an organisation.

Senator McALLISTER: Do you have a written description of what the organisation's approach is to categorising investment opportunities?

Mr Neal : Yes. I'm sure we can provide that. I will take that on notice.

Senator McALLISTER: Using the definitions that are deployed by your organisation, not other people's definitions, can I check how much of the fund is invested in venture capital?

Mr Neal : I don't have that number here with me. I'd have to take that on notice and get number for you.

Senator McALLISTER: So there's no update on the $2 billion at this point—the number you provided in October?

Mr Neal : The number will not be materially different to that. These numbers change very slowly.

Senator McALLISTER: How much of that $2 billion is invested locally? In October, it was tens of millions.

Mr Neal : Yes, it would still be of that order.

Senator McALLISTER: There would be no material change to that?

Mr Neal : That's correct.

Senator McALLISTER: You talked in October about attempting to foster local industry. Can you talk about the fund's activities in fostering local venture capital activity?

Mr Neal : First of all we engage with industry. In doing so, we are bringing the global perspective that we have. Hopefully that brings our own insights to the organisation about what makes venture capital firms successful or not, what the global trends that we're seeing are and how those might help the local industry. One of the particular, concrete things we did was we brought one of the managers that we partner with to help us find the best venture and growth organisations in the world. We brought that organisation to Australia and we held a full-day seminar. We invited all of the main venture capital funds to participate.

Senator McALLISTER: When was that, Mr Neal?

Mr Neal : It was in August 2017.

Senator McALLISTER: So we had some of the finders come and talk to some of the local market participants?

Mr Neal : Yes. Since then we've engaged that same organisation to have a specific role to come in and help us review the local industry. That not only works for us, but they're looking at that from their perspective of their global client base as well.

Senator McALLISTER: When you say 'have a look', are they on a retainer or are they doing a one-off piece of work?

Mr Neal : To actively research the local industry on an ongoing basis.

Senator McALLISTER: What is the contractual basis of that arrangement?

Mr Neal : I'd have to check that for you. I would be guessing about the precise arrangements. I will take that on notice. We will have an allocation. I think the way it works is we have broader allocation to the organisation, which is to go and find good ideas for us globally. We have said to them that we'd like them to specifically look at the Australian marketplace within that context. I don't think it's any more than that.

Senator McALLISTER: Now I am confused. You have a broad budget line in the organisation for obtaining external research support?

Mr Neal : They are an organisation that we engage to run a portfolio of fund managers for us—to find, engage with and manage a portfolio of venture capital managers for us. There's a whole bunch of reasons why we work through a partner for that. It is a very large universe of generally quite small organisations, so the resources required to cover that marketplace across the globe are significant. They are complex organisations to maintain a relationship with and contract with. There are complex things that they do, and it takes expertise to understand that. We contract with an organisation which helps us find these organisations, then they manage a portfolio of organisations for us. We have asked them to include Australian venture capital within that portfolio, if they can find organisations that are of suitable standard. In effect, it is saying that we require them to put a significant amount of effort into the Australian marketplace.

Senator McALLISTER: I'm trying to understand the means by which this partnership was established. Is it a long-standing partnership?

Mr Neal : It is.

Senator McALLISTER: So when they came to Australia in August last year, that was not the first occasion that you engaged with this firm. It's in the context of a longer partnership?

Mr Neal : Depending on how you measure it, you could argue that they are one of our most successful partnerships. We've had great investment success with this organisation, but it has been predominantly in the US and some other jurisdictions as well, but not previously in Australia.

Senator McALLISTER: How long have you been working with them?

Mr Neal : I will have to check this if you want a precise answer, but it is either 2008 or 2009

Senator McALLISTER: A decade, perhaps.

Mr Neal : Yes.

Senator McALLISTER: How many similar partnerships would you have with similar organisations?

Mr Neal : Within the venture and growth space, we wouldn't have any.

Senator McALLISTER: So they're the only provider in the venture and growth space?

Mr Neal : Other than the work we do ourselves. For the larger funds, we cover them ourselves. We go and do our own work. But when it gets to smaller funds, which is often where a lot of the really interesting ideas are, we don't have the resources internally to cover that. So we have a partner in place to help us cover that.

Senator McALLISTER: And a reference back to your earlier evidence: this is in relation to about $2 billion worth of investment.

Mr Neal : Yes. I should say that there is another organisation that we use. We do have one other organisation which runs a fund of venture capital funds for us.

Senator McALLISTER: Are we able to have the names of these two organisations?

Mr Neal : Greenspring is the one we have been talking about most, and the other one is Horsley Bridge.

Senator McALLISTER: I asked you about the contractual basis of these relationships and you said you would take it on notice, which was possibly appropriately cautious. Do you pay them a set amount monthly? Is it based on their successes? I'm not trying to understand the precise details but more the broad contractual basis on which you engage these partners.

Mr Neal : We would commit an amount of money to them. We would say, 'We would like you to go in and try to invest a certain amount of money into these types of funds as you find good quality ones. We would typically pay them a basis point fee, so a percentage of the assets that they deploy. We pay them a management fee and then we would pay them a performance fee, which would be a proportion of the return that they generate, so that they're incentivised. That's how they would make most of their money. They would be incentivised to find strong performing funds.

Senator McALLISTER: In relation to Greenspring, you said that you have tasked them specifically with a focus on the Australian market and Australian market opportunities. When did that happen?

Mr Neal : I think it was the beginning of this calendar year.

Senator McALLISTER: So since the August seminar?

Mr Neal : Correct.

Senator McALLISTER: At some point this year, or at the end of last year, you tasked them—

Mr Neal : Between August and now. I don't want to give you the impression that Greenspring never covered Australia. They came here and they did trips. We really just formalised and raised the profile of Australian in their thinking, from our perspective.

Senator McALLISTER: In doing that, did you create any additional financial incentives within the commercial arrangements?

Mr Neal : I don't believe so; I think it fell under the same fee arrangements as the rest of the—

Senator McALLISTER: I'm interested in understanding what your ambition is in this area—or your sort of strategic intention. Back in October, you said:

We would be hopeful that those low numbers can change and that we would see our portfolio having a higher exposure to the local venture capital industry.

We're not there yet—I don't imagine you'd say we're there yet. That hasn't come to fruition since October.

Mr Neal : It takes time, that's right.

Senator McALLISTER: What's the trajectory that you'd like to see over the next two years?

Mr Neal : I think it's very hard. I would like us to find more funds—I'm not sure what more means; I suppose as many as possible—but they have to be global grade. Our task is to generate the strongest returns that we can and to go where those returns are the strongest. It's not in our interests or in the interests of the taxpayer, I don't think, for us to be investing in organisations which don't meet that grade. But, where we can find Australian businesses that meet that grade, that is good news for us. We have a mandate that's denominated in Australia dollars and that is related to Australian CPI. Australian investments are the best match for those if we can find investments that work for us. We also should have a comparative advantage in dealing with local businesses—that helps us. So there are lots of good reasons why it's good for us to invest through Australian businesses where they stack up. We would all like to see that industry continue to improve and demonstrate its credentials.

Senator McALLISTER: Has the analysis undertaken internally or by Greenspring suggested any quantum about the scope of the opportunity that presents in the next couple of years?

Mr Neal : The answer is no. These are very small amounts of money in a very large portfolio, so, if the opportunities are good enough, then there's plenty of opportunity for us to continue to contribute more capital. There is certainly no cap or limit or anything like that from a Future Fund portfolio perspective. It would not be possible for us to have too much Australian venture capital in a $160 billion portfolio. So, not really, no.

Senator McALLISTER: Unlimited? All right—can I ask about something quite different, Chair?

CHAIR: You certainly may.

Senator McALLISTER: The government has introduced some legislation to establish the Aboriginal and Torres Strait Islander Land and Sea Future Fund. I'm interested to understand whether that was discussed with you, Mr Neal, prior to the introduction of the legislation.

Mr Neal : We were asked whether that was something that we could do and whether that was a capability that we had, which was a fairly short conversation because, of course, it is. We are able to run portfolios of assets; that's our role. Beyond that, we've not been involved in any of the details other than, I suppose, providing advice to the department on the way that the bill would best work to allow us to do our job—although, I think the bulk of that is really just that it reflects the way that the other funds are run.

Senator McALLISTER: When did those conversations commence with government—or, rather, with the department; is that correct?

Dr Helgeby : Senator, the conversations about the legislation—or, rather, how legislation should work in this environment—I think would have taken place after the government made the announcement.

Senator McALLISTER: I'm sorry, Dr Helgeby. I apologise, could you repeat that last answer?

Dr Helgeby : In terms of a specific time frame, I'd have to take that on notice. But we engage on legislation after decisions are taken. So the decision comes first, and then—

Senator McALLISTER: Alright, let us put aside the question of the legislation and the drafting. But, in terms of the decision to establish this new entity, was Mr Neal consulted before the decision was taken?

Dr Helgeby : Before the decision was taken. Senator, the actual process for this came out of a long series of work where there was actually some work involving the Aboriginal Land Corporation and PM&C. They had some work undertaken by Mr David Murray. I don't know exactly the timing of that, but that was the genesis of this thing.

Senator McALLISTER: So we don't know when that work was undertaken by Mr Murray?

Dr Helgeby : That's not under our portfolio; that's in the Indigenous part of the PM&C portfolio. But there was work prior to the government decision and then work subsequent to the government decision. The work prior to the government decision was largely undertaken in the PM&C portfolio.

Senator McALLISTER: Did the PM&C department speak to you during that phase, Mr Neal? No. So a decision is taken, and then, because it has implications for an agency within the Finance portfolio, you become involved.

Dr Helgeby : Yes.

Senator McALLISTER: What will be the process for settling the investment mandate?

Dr Helgeby : Senator, as I explained previously to Senator Stoker, an investment mandate, in this case, is set by two relevant ministers: the Minister for Finance and the Treasurer. In this particular case, there will also be a consultation with PM&C, and an investment mandate can only come into effect, obviously, once the legislation has passed. So it would, in this particular case, follow on, or that work in detail would follow on, from the legislation.

Senator McALLISTER: I actually can't recall if we've discussed earlier, in relation to the process of setting the mandate for the Future Fund, anticipating engaging external advice in support of that decision process, Doctor Helgeby.

Dr Helgeby : We call upon the Government Actuary, or Mercer, for all of these sorts of things. But they are one source of advice in the process.

Senator McALLISTER: But that is not something you'll initiate until after the legislation has passed.

Dr Helgeby : Clearly, the government has a policy and, clearly, there is legislation. I think there has even been reporting on the legislation. So we are turning our minds to that, but, in terms of actually fully framing an investment mandate, that can only be put in place after the legislation is in place.

Senator McALLISTER: Is it your expectation that the Indigenous Land Council board members would be involved in that process?

Dr Helgeby : The process is something we're considering at the moment. The detailed process is something we're considering at the moment.

Senator McALLISTER: So you are not yet in a position to say whether or not Indigenous representatives would be involved in that decision?

Dr Helgeby : Certainly, we would seek to engage Prime Minister and Cabinet, and then, in those conversations, we will also consider how best to conduct a process of consultation around the mandate.

Senator McALLISTER: It's an important question, isn't it, for a government that is committed to doing things with Indigenous people and not to them, notionally?

Dr Helgeby : Senator, I can only comment on the process as it stands at the moment.

Senator McALLISTER: Minister, can you provide any insight? Do you think that the investment mandate for the Aboriginal and Torres Strait Islander Land and Sea Future Fund will be the subject of consultation with Indigenous representatives?

Senator Cormann: That is a matter for the Minister for Indigenous Affairs. This part of the portfolio is responsible for the investment of the funds. In terms of how these matters are otherwise managed, I would have to refer you to the Minister for Indigenous Affairs.

Senator McALLISTER: Can I just come back, Mr Neal, to some of the issues we were talking about earlier around the investment in Blackbird, which is something of a change of direction since we last discussed it. How much was invested in Blackbird?

Mr Neal : I'd have to check for you. If you want a precise number, I'll have to take that on notice. It's of the order of a $20 or $30 million commitment to their fund.

Senator McALLISTER: You talked about the investments made by the fund being constrained only by the availability of global-grade investment opportunities. For this market, what do you mean by 'global-grade'?

Mr Neal : I mean the quality of the organisation and the ability for them to generate investment returns is as high as the best other funds that we can find across the globe.

Senator McALLISTER: What are the characteristics you're looking for when evaluating the quality of an organisation?

Mr Neal : Ultimately, these returns are generated by the quality of the team and the decisions that they make and their ability to understand trends in the industry and what's likely to be a successful idea and what isn't and their ability to support a new business and help them make the decisions that they need to make to be successful. One of the ways that you can get to that quality is to spend time with the organisation and understand their processes and the like. Another of course is to look at their history and their track record. Venture is an interesting area. The phrase that's often used is that success begets success. If you have a strong track record of having supported entrepreneurs, then other entrepreneurs tend to want to come to you, because obviously they want whoever is going to help them the most. So you do tend to find that there's this self-reinforcing element of venture capital where people who are good tend to get the flow of the best ideas, and so they can continue to maintain their advantage, and that's one of the issues for the local market—it's a new generation and there isn't that history. They're people who have had success in other fields, but there isn't exactly that history. That's one of the challenges: how do you generate that history of demonstrating success? It's one reason why institutions are cautious.

Senator McALLISTER: Have you provided advice to the local market about the same set of issues we're discussing about the parameters or qualities that determine what you'll invest in and what you won't invest in?

Mr Neal : Absolutely, I believe we have. I believe we are always very clear, not just in the local venture market but in all aspects of investing. It's in our interests for anybody who has an idea to understand what we think is a good idea. Obviously we want people to bring us the ideas that are going to suit our criteria. That's in general, but the other thing I would add is that that is in very large part—that day I mentioned with Greenspring, is what that was about; that was about what they think is a good idea, so they're hearing it from us. We also brought Greenspring—

Senator McALLISTER: I will just need you to clarify that evidence. When you said 'that is what they think', who is the 'they' you are referring to?

Mr Neal : That was what Greenspring thinks. A big part of that day was to allow the local industry to understand what a very successful global allocator thought made success.

Senator McALLISTER: What did they say? So far we have talked about the history of producing returns and I think perhaps a more nebulous idea about the quality of an organisation. Were they the only two things discussed?

Mr Neal : Perhaps that sounded nebulous because we are starting to stray into a level of detail—obviously, my day job is reviewing venture capital funds in detail. But, nebulous as it may be, that is exactly what we are trying to do. We are trying to understand the quality of the venture capital firms' ability to find smart entrepreneurs with smart ideas and assess those ideas. They have to kill ideas that aren't working. They have to kill them early before, they've put too much money into them, and put their money into those ideas that are proving to be successful. In particular, I think what makes a good venture capital manager stand out is that ability to recognise early when something isn't working and cut it early so that you can allocate the capital to the better ideas.

Senator McALLISTER: This is an interesting question for the local industry because, as you observe, it's new. One way of measuring whether or not an organisation has those characteristics is by looking at its actual performance. That to some extent is a lag indicator.

Mr Neal : That's right.

Senator McALLISTER: But the things you've just talked through are, arguably, lead indicators, which are notoriously difficult to measure or assess. Do you or does your partner, Greenspring, have a process for doing that that could be communicated to the local market?

Mr Neal : They certainly do. That's what I was alluding to before. What we had Greenspring do in that seminar was to articulate that process to everybody. But I'm also very sure that when they engage one on one with these organisations they are doing the same thing. They are making it very clear what they see as the criteria for success.

Senator McALLISTER: How many organisations attended that workshop in August?

Mr Neal : In the order of 15.

Senator McALLISTER: What proportion of the market do you think that represents?

Mr Neal : I don't know the answer to that question. Again, you get into definitional issues as to what's a venture firm and what isn't and things like that. But I believe we had the vast majority of the funds of sufficient scale for an institutional investor such as ourselves to commit to.

Senator McALLISTER: The vast majority.

Mr Neal : Of that subsector.

Senator McALLISTER: Are you confident you are reaching a good proportion of the market—

Mr Neal : I believe so.

Senator McALLISTER: —in that outreach exercise? That's one exercise. Are there any other past or planned efforts to engage the sector?

Mr Neal : It's an ongoing process. Every time we are meeting with a local fund we are engaging with that sector. Our chief investment officer spoke at the industry body's annual conference, and talked there about what our requirements are, why we like the sector, what we are looking for, what we are wanting to avoid and those sorts of things. So, we are engaging in the industry in that way. I think that's just the normal course of our engagement in any sector.

Senator McALLISTER: Coming back to the Blackbird decision, was Greenspring involved in selecting Blackbird for investment?

Mr Neal : They were.

Senator McALLISTER: What made Blackbird stand out as a fund worth supporting?

Mr Neal : It would be all those things we've talked about. It would be an assessment based on those types of criteria. What makes them stand out ultimately boils down to Greenspring's confidence and our confidence that they are going to be able to find good ideas and going to be able to grow those ideas and ultimately exit those ideas at a profit for us, and that they have the skills and the processes to create a high likelihood that that will happen.

Senator McALLISTER: Should we expect further announcements about additional local VCs that have secured your support?

Mr Neal : As we find good investments—it is probably unusual for us to make announcements of new investments that we make. I can't exactly remember the context of that announcement. But I think you should expect that we will continue to do our best to find good investments for the fund, and that we are very serious about trying to do that within Australia.

Senator McALLISTER: You said you are uncertain about the context of the announcement. Was there an announcement?

Mr Neal : You told me there was! I can't exactly—

Senator McALLISTER: No, it was a newspaper article. Sorry. I apologise if I did say that. I'm just interested in understanding how it came to be in the newspaper.

Mr Neal : In this case there was sort of an announcement. Blackbird did an interview. They checked with us whether they could mention it, and we agreed.

Senator McALLISTER: I see also that the Future Fund declined to comment. Just to wrap this up, we've talked about the total investment that the Future Fund makes in venture capital offshore and that perhaps one or two per cent of that occurs in Australia. Do you think that that's consistent with what public expectations would be about the role of the fund, given how significant the venture capital sector is in growing the economies of other countries?

Mr Neal : I think the role of the future fund is very clear. It is to generate strong returns for the government and for the Commonwealth. We've always been very clear that we should go where those returns are the best and build a portfolio of those best ideas that is diversified and not overexposed to any one geography or sector. We've tried to be as clear as possible over the years that that is what we do. I would add that venture is hard. It's also a highly specialist area that tends to have its own ecosystem around it. There are many, many countries in the world that are in a similar position to Australia's of trying to build this type of ecosystem. Ideas don't tend to respect boundaries at all—you can develop an idea somewhere and you can deploy it in a very different geography. What they need is the ecosystem—

Senator McALLISTER: Although, interestingly, that's not what our people here say. They say they find it hard to connect to the funds in other geographies, and as you mentioned in your early remarks, there is some competitive advantage that accrues to you by virtue of being physically here and in a position to build relationships and evaluate—

Mr Neal : The entrepreneurs, I think, are the people saying what you are saying. One of the features of good-quality funds is that they have that ability to connect the entrepreneur to the global marketplace, and that is one of the things we are looking at for venture funds to be able to do. If a venture fund is only connected locally and is only trying to help the entrepreneur to access the local marketplace, that is highly constraining and that entrepreneur is better off being in a much larger market somewhere. If the venture fund can't offer that capability, can't make that connection, that's when you see the people with the ideas going elsewhere.

The point I was going to make was that these things create their own ecosystem: entrepreneurs feed off other entrepreneurs and the connections and the capital are there. The other sort of infrastructure that is required to grow ideas tends to move, which is why you see groupings—you see the Silicon Valley grouping and there is a very successful industry in Israel. There are very few other large groupings of venture. It is a difficult market to grow. I can answer your questions on the values, if that helps.

Senator McALLISTER: That would be terrific.

Mr Neal : The latest numbers for venture capital, according to our definitions, is $2.2 billion, and in developed market growth, which is the next stage, it's $3.9 billion.

Senator McALLISTER: And locally the same figure, I think you confirmed.

Mr Neal : Yes.

Senator McALLISTER: Thanks very much, Mr Neal. I think that's all I have for you.

Mr Neal : I also have an answer to Senator Carr's question on the returns for the Education Investment Fund. From 1 July 2013 to 31 March 2018 the Education Investment Fund returned 2.6 per cent per annum.

CHAIR: Thank you very much. I thank you for your evidence here this morning.