Answers to Questions

Funds SA

176 The Hon. H.M. GIROLAMO ().16 November 2022). Can the Treasurer advise—

1. Why is Funds SA's net income negative $2.1 billion?

2. What is the reason for the movement?

3. Why has the net income for Funds SA decreased, but net assets have increased?

The Hon. K.J. MAHER (Minister for Aboriginal Affairs, Attorney-General, Minister for Industrial Relations and Public Sector): The Treasurer has been advised:

1. Per Funds SA's Schedule 1 Statement of Income and Expenses of Assets Under Management, total net income for the government and client funds under Funds SA's management for the 2021-22 financial year, was negative $2.1 billion. This is driven by the fact that Funds SA's assets under management are valued at market values in its financial accounts. As the prices of investment assets in the equities and fixed income asset classes fell over 2021-22 (refer 2. below), this generated significant realised and unrealised losses on these asset classes. This is reflected in schedule 1, which shows that realised and unrealised losses (and expenses) across the whole portfolio totalled $3.3 billion, partly offset by rent, interest and dividends received of $1.2 billion, to produce the net loss figure of $2.1 billion.

2. During 2021-22, the value of many asset classes, particularly fixed income and equities asset classes, fell sharply mainly as a result of a combination of high inflation, increasing interest rates and credit spreads, rising risks to economic growth and the possibility of recession, the ongoing Russia-Ukraine conflict and COVID-19 related lockdowns in China.

3. Funds SA's financial statements are essentially broken up into two categories: (1) The Statement of Comprehensive Income, Statement of Financial Position, Statement of Changes in Equity and Statement of Cashflows measures the results and financial position of Funds SA's corporate activities as an individual reporting entity (quite distinct and separate from the funds it manages on behalf of government and clients)—i.e. the corporate entity that is owned by the SA government; (2) The Schedule 1 Statement of Income and Expenses of Assets Under Management and Statement of Net Assets Under Management, which measures the results and financial position of the funds of government and clients under Funds SA's management.

The net income of negative $2.1 billion for the 2021-22 financial year relates to the latter, whereas the net assets in Funds SA's Statement of Financial Position, relate to the former. The increase in net assets of Funds SA during the 2021-22 financial year of $2.9 million (from $10.9 million at 30 June 2021 to $13.8 million at 30 June 2022) is a result of the net surplus reported in the Statement of Comprehensive Income of $2.9 million in 2021-22.

Additional Information—Prior year results for comparative purposes

For comparative purposes, the following table shows Funds SA's corporate operating surplus along with the corresponding net income (loss) derived from Funds SA's funds under management for each of the past four financial years.

The first column shows that Funds SA's target to achieve a achieve cost neutrality or a small annual operating surplus, in accordance with its cost recovery policy, has been achieved in the last four years. Note that the 2019-20 result was impacted by materially lower corporate fee revenues caused by the material sell-off in financial markets upon the onset of COVID in early 2020.

The second column relates to the net income (or net profit/loss) derived from Funds SA's funds under management for the corresponding financial year. As discussed under 1. above, the major driver of net profit or loss on holding investment assets is the market valuation of those assets, which can be quite volatile over short-term time frames.

For example, the result in 2019-20 (a net loss of $0.3 billion) was caused by the sell-off in financial markets following the onset of COVID in early 2020. The result in the next year (a $7.1 billion net profit in 2020-21) was caused by the massive rebound in global asset prices in response to the economic stimulus engineered by governments and central banks across the globe to support industry and workers and to loosen monetary policy (i.e. reduce interest rates).