Peter Costello, chairman of the $149 billion government Future Fund, warned that rising global interest rates will put “downward pressure” on asset prices around the world.
Mr Costello also issued a call to arms to foreign government-backed investment funds, such as from China, to increase transparency and improve governance, to overcome mounting national security hurdles to invest in sensitive assets such as critical infrastructure in Australia and the United States.
The former federal treasurer told The Australian Financial Review in an interview on Thursday that the unwinding of the “very unusual” ultra-low US and global borrowing costs would impact investors in various asset classes around the world.
“Asset prices are very high,” he said. “As the price of money goes up around the world, that could mean that asset prices come down.”
“As money becomes harder to get and more expensive, asset prices will moderate and that means the investment climate will be harder to produce returns.”
Reflecting the expected tougher investment climate, the Future Fund last year cut its benchmark target return to inflation plus 4-5 per cent a year, down 0.5 of a percentage point.
The sovereign wealth fund, which Mr Costello founded as treasurer in 2006 to pay for government employee pensions, has delivered an average 7.9 per cent annual return since inception.
Mr Costello spoke to the Financial Review ahead of his scheduled speech to sovereign wealth fund managers and pension investors in Sydney on Friday.
‘Every right to ask for transparency’
Sovereign wealth funds, which are owned by governments, have about $US8 trillion ($11.2 trillion) in assets globally.
However, sovereign wealth funds and state-owned enterprises, especially from China, are running into national security barriers in trying to invest in sensitive assets in western countries such as Australia, the US and Germany.
Two years ago then-treasurer Scott Morrison blocked China’s State Grid Corporation and Hong Kong’s CKI from acquiring the NSW government’s Ausgrid electricity distributor entity.
The Trump administration and US Congress have toughened up foreign investment rules, broadening national security tests to make it harder for rival China to acquire emerging technologies, infrastructure and strategic assets.
Mr Costello, who as treasurer in 2001 blocked Royal Dutch Shell’s takeover of Woodside Petroleum, said “Australia has every right to ask for transparency” from foreign investors.
“Sovereign wealth funds will want to be able to continue free investment and will have to make sure they conform to high transparency and good practice.”
He said the independent and transparent Future Fund offered a best-practice model for foreign investment vehicles to follow. Still, he was mindful that in the current protectionist climate, even the Future Fund may not be immune from barriers overseas.
“The trouble is once countries start making it harder for some sovereign wealth funds, you can all be bundled into the same category.
“If foreign investment restrictions become tighter they can sweep up a whole lot of people.
“There is no reason to sweep the Future Fund into a basket of sovereign wealth funds that you should worry about because we are open and transparent.”
Mr Costello said foreign sovereign wealth funds and state-owned enterprises should consider partnering with Australian investors to overcome hurdles.
“One of the things that might help foreign investors coming into Australia is partnering with local institutions.”