The tenure of Paul Costello as general manager of Australia’s Future Fund is being widely praised following the announced that he will step down at the end of this year.
Costello was the fund’s first employee when it launched in November 2006. He has overseen its growth to A$87 billion ($81 billion) in investments held with some 60 managers around the world, from an initial A$18 billion in cash.
The fund was fortunate to have a fairly large cash holding as the global financial crisis unfolded, thanks to the timing of its foundation.
But one hedge fund manager, who asked not to be identified, notes that running the Future Fund is as much a political as an asset-management job, with little upside for outperformance and harsh criticism for poor performance.
“You’re using money owned by the mums and dads of Australia, and you get shot down in flames,” he says. “Anything that is not a totally mainstream and liquid [investment] raises eyebrows, and what’s the upside?”
Despite the political risk, Costello has recently overseen the Future Fund’s foray into alternative investments, which made up A$7.8 billion in assets at the end of the March quarter(the most recent figures available). That represents 12.3% of assets, up from virtually zero at the end of the 2007-08 fiscal year.
It recently expanded into property (A$4 billion, 4.0% of assets) and infrastructure (A$2.1 billion, 3.2%), with other holdings in private equity (A$1.5 billion, 2.3%).
It holds A$3.9 billion in shares in Telstra, Australia’s largest phone company. It still has 16.5% of assets in cash as of the end of March, worth A$10.5 billion, with other major holdings in global equities (A$17.1 billion, 26.9% of assets), bonds (A$14.0 billion, 22%) and Australian equities other than Telstra (A$8.1 billion, 12.8%).
The Future Fund is increasingly important not just in equity investments but in sectors such as property, where it is expected to become Australia’s biggest landlord by 2020. By way of comparison, its total combined assets are now roughly equivalent to the size of Australia’s total property trust sector.
The departure of Costello, who has not announced any plans for his future, has left the fund hunting for a replacement. The board said it is conducting a search both in Australia and overseas.
David Hartley, the Sydney-based chief investment officer of the Sunsuper pension fund, says he expects Costello’s replacement to come from Melbourne’s investment community, where the Future Fund is based.
In a statement announcing his decision to step down, Costello revealed he felt the fund now needed new management as it moved into maturity.
“I am proud to have led the agency through its start-up phase and to have brought together the people, capabilities and infrastructure for its future,” he added. “As the organisation moves into a new phase, the time is right for new leadership.”
Costello came to the Future Fund from the New Zealand Superannuation Fund, where he served as its inaugural CEO until his resignation there in August 2006. He said at the time that he and his family wanted to return to Melbourne.
The chairman of the fund’s board of guardians, David Murray, thanked Costello for his work in the Future Fund’s early development, suggesting he had played a critical role in building the agency and recruiting a skilled team.
“These foundations have been laid while navigating the additional challenges of an unprecedented period of volatility in financial markets,” he adds.