medical research future fund annual report

01 FY23 Performance

Investment environment in 2022–23

In 2021 we issued a call to attention, publishing A New Investment Order which predicted a return of inflation and rising interest rates, more conflict and deglobalisation. We then explained how we are investing in this more challenging world with a second paper – The Death of Traditional Portfolio Construction? The investing environment continues to be shaped by the themes in the papers, with the Future Fund well positioned to navigate this complex new environment.

Much of the 2022–23 financial year was about adjusting to life after the COVID-19 pandemic and to the ongoing war in Ukraine, with these shocks having long-lasting impacts on economies, geopolitics and the way we invest. Firms, households, governments and investors have all had to adjust to changed conditions and more complex circumstances.

Forward-looking returns for traditional portfolios are challenged and we are adapting how we invest.

After central banks increased interest rates sharply, there is still some concern that inflation may not permanently return to a comfortable level without significant cost. Services inflation, for example, is proving hard to beat in some countries as labour markets remain resilient. Financial markets are still confident that central banks can anchor inflation expectations, and the chances of a worst-case wage price spiral appear low – but not zero.

Higher inflation on a more permanent basis would have implications for investors, like the Future Fund, who target real returns. We have spent significant time planning for a range of inflation scenarios and preparing the portfolio for a more complex, challenging and volatile investment environment in the future.

Over the last year there were significant impediments introduced that restricted the free flow of investment and trade. Economies are diverging. Tariffs and trade barriers have been re-emerging; critical supply chains are pivoting to geopolitical allies or were brought onshore. A more assertive China; an emphasis on national security by the Biden Administration; increased tensions around Taiwan; investment bans; and export restrictions on critical minerals added to the challenging backdrop.

Adjusting to a rapid increase in interest rates in 2022–23 was not easy. Some of the investment and economic assumptions made through the years following the global financial crisis of 2008 failed to hold, prompting financial instability. There were flare-ups in market volatility as the UK pension system grappled with a sudden sell-off in UK bonds. In the US, tightened credit conditions led to a small number of regional banks failing. Despite the tighter credit conditions, the US economy in particular, remained resilient.

Looking ahead, how responsive underlying inflation proves to be to interest rate increases so far will determine whether a ‘soft landing’ can be achieved, or whether a deeper economic slowdown will be required to get inflation back within target bands.

In some countries, extraordinary fiscal support at a time of record low levels of unemployment is complicating central banks’ ability to bring down underlying inflation.

In the US, the Inflation Reduction Act of 2022 and the CHIPS and Science Act of 2022 (CHIPS Act) highlight an increasing role of government in economies and markets. The Inflation Reduction Act will lead to significant spending on climate change initiatives. The CHIPS Act highlights the inflationary impacts of building resiliency into economies, of insuring against potential conflicts, and of pursuing a more interventionist approach to industrial policy.

Developments in generative artificial intelligence (AI) sparked the promise of a potential boost to productivity. This could enable economies to grow at higher rates in the longer term and help counterbalance higher inflationary trends elsewhere. Nevertheless, the shorter-term implications of AI on inflation and labour markets are less clear.

Despite the more challenging global environment, equity markets had a strong year, particularly in the second half. Sentiment was buoyed by hopes for a ‘soft landing’, an end to the interest rate hiking cycle, growth prospects around AI and spending on climate change initiatives.

The near-term outlook will depend on how these factors unfold. The investment environment that lies ahead, however, is likely to remain challenging.

Year at a glance

The Future Fund is a long-term fund created to strengthen the Commonwealth’s long-term financial position. The Fund’s 10-year return of 8.8% per annum remains above its benchmark target of 6.9% per annum.

The annual return of 6.0% is a solid result and reflects the significant activity undertaken to reposition the portfolio for difficult conditions. High and sticky inflation, strong labour markets, geopolitical tensions and rising interest rates are making for challenging investment conditions, even as some of the effects of the pandemic dissipate.

The Future Fund is positioned cautiously rather than defensively, and we will remain vigilant and continue adjusting where needed to keep the portfolio resilient in the years ahead with a focus on the long term and risk as per the mandate.

Total funds under management

$ 256.2 bn at 30 june 2023.

*The Disaster Ready Fund was previously named the Emergency Response Fund until 1 March 2023.

Investment performance

The future fund .

The Future Fund was established in April 2006 to strengthen the long-term financial position of the Commonwealth of Australia.

Investment mandate

Cpi + 4.0%–5.0% per annum.

To achieve an average annual return of at least the Consumer Price Index (CPI) + 4.0% to 5.0% per annum over the long term, with an acceptable but not excessive level of risk.

pa return in FY23

value at 30 June 2023

pa 10-year return

pa target 10-year return

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Future Fund returns, target benchmarks and volatility over time

Period to 30 June 2023	Return (% pa)	Target return (% pa)	Volatility (%)
From inception (May 2006)	7.7	7.0	4.6
10 years	8.8	6.9	4.7
Seven years	7.7	7.1	5.0
Five years	7.2	7.4	5.5
Three years	8.6	9.3	5.8
2022–23 financial year	6.0	10.0	5.5

• From 1 July 2017 the Fund’s Investment Mandate target return was reduced from the CPI + 4.5% to 5.5% pa to the CPI + 4.0% to 5.0% pa over the long term, with an acceptable but not excessive level of risk.
• Industry measure showing the level of realised volatility in the portfolio.

Future Fund Equivalent Equity Exposure since inception

Measuring risk.

One of the primary metrics we use to understand and manage the broad market risk exposure of the Future Fund is Equivalent Equity Exposure (EEE). EEE estimates the amount of market exposure we have when looking through the whole portfolio.

The chart above demonstrates how the EEE of the Future Fund has changed over time. We are currently in the seventh distinct risk-taking regime for the portfolio since establishment.

• The build of the Future Fund portfolio was suspended in late 2007 due to concerns over financial markets stability and the sustainability of high asset prices, and a very low risk profile was maintained into the global financial crisis.
• Portfolio risk exposure was increased as extraordinary and globally coordinated economic policies were implemented to fight the crisis.
• Risk levels were raised further as the European crisis subsided and the President of the European Central Bank committed to ‘do whatever it takes’ to underwrite the integrity of the euro.
• As expected returns declined (given strong market performance supported by low interest rates), portfolio risk was gradually reduced to moderately below normal levels.
• Risk levels were increased towards more normal levels, reflecting the emergence of strong economic growth and corporate earnings, and central banks signalling an extension of accommodative monetary policies, together with the decision to increase the Fund’s structural risk appetite.
• Risk levels were reduced to moderately below neutral, reflecting the elevated risk environment resulting from the COVID-19 pandemic and policy response.
• The structural risk level was adjusted during the 2020–21 financial year and we narrowed the range around which we expect to manage the portfolio. Subsequently, EEE was managed reasonably close to neutral structural levels.

Risk positioning

The EEE range within which we are expected to operate most of the time was reviewed and uplifted to 55–65 as part of the recent deep review of our investment strategy.

Throughout 2022–23, the portfolio risk setting has averaged close to the middle of the range and at 30 June 2023 the EEE stood at 60.

Medical Research Future Fund 

The Medical Research Future Fund was established in 2015 and will improve the health and wellbeing of Australians by providing grants of financial assistance to support medical research and medical innovation.

RBA + 1.5%–2.0% per annum

To achieve at least the Reserve Bank of Australia cash rate target + 1.5% to 2.0% per annum, net of investment fees, over a rolling 10-year term.

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Medical Research Future Fund returns, target benchmarks and volatility over time

Period to 30 June 2023	Return (% pa)	Target return (% pa)	Volatility (%)
From inception (22 September 2015)	4.1	2.7	2.9
Seven years	4.3	2.7	3.0
Five years	4.1	2.5	3.4
Three years	5.0	2.5	2.8
2022–23 financial year	4.4	4.4	3.2

Our expected EEE range for the Medical Research Future Fund is 27–34.

At 30 June 2023, the EEE stood at 30, which is below the middle of the range.

Aboriginal and Torres Strait Islander Land and Sea Future Fund

The Aboriginal and Torres Strait Islander Land and Sea Future Fund (ATSILS Fund) was established in February 2019 to enhance the Commonwealth’s ability to make payments to the Indigenous Land and Sea Corporation.

CPI + 2.0%–3.0% per annum

To achieve an average annual return of at least the CPI + 2.0% to 3.0% per annum over the long term, with an acceptable but not excessive level of risk.

ATSILS Fund returns, target benchmarks and volatility over time

Period to 30 June 2023	Return (% pa)	Target return (% pa)	Volatility (%)
From inception (1 October 2019)	4.3	6.0	4.7
Three years	5.9	7.3	3.6
2022–23 financial year	4.5	8.0	4.0

Future Drought Fund

The Future Drought Fund was established in September 2019 to support initiatives that enhance the drought resilience of Australian farms and communities.

Future Drought Fund returns, target benchmarks and volatility over time

Period to 30 June 2023	Return (% pa)	Target return (% pa)	Volatility (%)
From inception (1 April 2020)	6.6	6.3	3.5
Three years	6.0	7.3	3.6
2022–23 financial year	4.7	8.0	3.9

Disaster Ready Fund

The Disaster Ready Fund was initially established as the Emergency Response Fund then renamed on 1 March 2023. It is used to fund natural disaster resilience and risk reduction.

Disaster Ready Fund returns, target benchmarks and volatility over time

Period to 30 June 2023	Return (% pa)	Target return (% pa)	Volatility (%)
From inception (1 April 2020)	6.6	6.3	3.5
Three years	6.0	7.3	3.6
2022–23 financial year	4.6	8.0	4.0

• The Disaster Ready Fund was previously named the Emergency Response Fund until 1 March 2023.

DisabilityCare Australia Fund  

The DisabilityCare Australia Fund was established in 2014 to help fund the National Disability Insurance Scheme (NDIS), which will support a better life for Australians with a significant or permanent disability and their families and carers.

BBSW + 0.3% per annum

To achieve a benchmark return of the Australian three-month bank bill swap rate (BBSW) + 0.3% per annum, calculated on a rolling 12-month basis. Investments must minimise the probability of capital loss over a 12-month horizon.

New expert report to guide Medical Research Future Fund

Media Release: Monday 6 June, 2016

A new report from the health and medical sector says the Medical Research Future Fund (MRFF) needs to prioritise closing gaps between health research, health practice and the health economy.

Translating Research for a sustainable future comprehensively brings together the positions of 160 of Australia’s leading health and medical research organisations, companies and personnel.

The review, contributed to by prominent researchers, universities, and businesses in the field, outlines the sector’s view on priorities for the MRFF over the next two and five years.

It has been presented to, amongst others, the offices of the Prime Minister, Opposition Leader and Greens Leader, the Chief Scientist and Health Ministers across the country, to inform policy-making.

“Australia has a world-leading research, and a world-class health system, but too often they operate in isolation,” said Research Australia CEO, Nadia Levin.

“The Medical Research Future Fund is the opportunity of a generation to bridge the gaps, and bring what happens in the lab together with what happens in clinical practice, and vice versa.”

“This report is from the experts in health and medical research and policy, and is designed to inform the Federal Government on the best direction of the MRFF.”

Research Australia believes that in its formative years, the Fund should have overarching strategic goals that ensure dual focuses of health and wellbeing, and economic prosperity:

• Health and Wellbeing: fund projects with clearly identified goals that will, if achieved, lead to better health and wellbeing through the translation of research into new clinical practices, health policy, products and services.
• Economic Prosperity: fund programs that support the commercialisation of Australian HMR to grow GDP; help contain health expenditure through using evidence-based practice to make the health system more efficient; and minimise the opportunity cost associated with the practice of research.

“Either way, this Fund will benefit the Australian people and economy, but its policy direction will be the difference between it being just important, or a monumental shift,” said Levin.

“At $20 billion it has enormous potential, however that will be built over several years, which means we need to manage the first funds in a disciplined, targeted manner, as well as initial expectations.

“That’s why Research Australia’s proposals for the first two years focus on establishing the framework for future health and commercial outcomes of relevance to Australia.”

Click for a copy of Translating Research for a sustainable future and more information. A summary of the proposed goals and priorities are below.

Proposed strategic goals

• The MRFF fund projects with clearly identified goals that are end user informed and lead to better health and wellbeing through new clinical practices, health policy, products and services.
• The MRFF should fund programs that support the innovation and commercialisation of Australian HMR, particularly in the early stages.
• The MRFF support research on improving health system efficiency and quality to achieve the best outcomes and value for expenditure on health care.
• The MRFF support programs with high relevance to the Australian community; in particular: (1) the translation of evidence into practice through the funding of research that identifies clear pathways to implementation; (2) including engagement with the end users in the health system, governments and the broader community; and (3) commercialisation of prospects that will be of value to Australia.
• That funding for research in disciplines such as health services research, public health research and health economics form an essential component of the MRFF Strategy. Research Australia is cognisant of the intersection of HMR with the other disciplines and recognises the value that occurs at this intersection. Assistive technology and diagnostics and health research with fundamental sciences should be appreciated and fostered.
• The MRFF should fund collaborative interdisciplinary research programs that include health systems, industry, the community and policymakers as partners.
• That where funding is provided in conjunction with another funding agency, the funding agreement must clearly stipulate how the costs of the project (direct and indirect) are to be met by the participants, with responsibility for each component of funding clearly allocated.
• The MRFF should be prepared to fund the indirect costs of research where doing so provides the best chance of success.

Proposed priorities Building to $20 billion over several years the MRFF has enormous potential, however funding for the MRFF will be relatively small in the first few years and there is a risk that the MRFF will be overwhelmed by the weight of public expectations before it has the opportunity to grow to scale.

Thus, Research Australia’s proposals below for the Funding Priorities are intended to utilise the MRFF’s initial two years’ funding in a disciplined and targeted manner to establish the framework for future health and commercial outcomes of relevance to Australia.

• Engage researchers with expertise in health economics research to help design the evaluation framework to be used for the MRFF and other reforms.
• Create a Centre of Research Excellence for the evaluation of health outcomes, using health economics and other health services research to measure whether changes made in the health system have had the expected/desired effect.
• The MRFF provide funding to build capability in the preparation of health information datasets, their linkage and analysis, and promote availability to other researchers.
• Fund the creation of a new Institute of Health Services Research or alternatively a collaborative of existing research organisations (a virtual institute) to build research capacity, coordinate effort and disseminate new knowledge and practices.
• Leverage the recent COAG commitment to health reform to fund the active involvement of researchers in the design, delivery and evaluation of the COAG health reforms in conjunction with state and territory governments, eg. the recent MBS Review.
• Invite the four NHMRC Advanced Health Research and Translation Centres to nominate initiatives to deliver improved health outcomes that could be undertaken immediately and have the potential for rapid national implementation.
• Fund an HMR stream of Linkage Projects with a focus on proposals that commercialise research discoveries or directly improve the delivery of health care.

Media Contact: Phil McCall 0438 619 987 or 02 9234 3822

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