David Gonski has been chairman of the Future Fund for only three months but already he’s hit real trouble with the fund’s surprising determination to invest in tobacco. The value of the fund’s tobacco holdings in 12 different cigarette companies is $210 million — up 40% on a year earlier.

At a Senate inquiry mid-week Gonski’s general manager, Mark Burgess, dug in his heels on the issue, suggesting the majority of sovereign funds are in tobacco and so the Future Fund should be allowed to follow suit.

Which is true … as far as it goes. But the position ignores Australia’s confirmed role as a leader in tobacco reforms. Moreover, the sovereign funds that follow best practice have been out of this miserable business for years. For example, Norway’s pension fund — the enterprise that served as a role model for the Future Fund — does not allow tobacco investing.

The Senate inquiry follows an attempt by the Greens to force the Future Fund out of investing in tobacco with a new law that would allow the government to direct the fund on asset allocations that are ethically debatable (the Future Fund also has unquantified holdings in armaments manufacturers, but that’s another story).

In its Senate submission defending its position, the Future Future says that any intervention by the government in its operations would mean the fund’s investment officers would have to revisit existing investment return objectives. In other words, if the fund became answerable to politicians it could not be expected to do as well as previously hoped.

This would seem to be an entirely rational defence: It turns out the gaspers are a nice little earner in these straitened times, especially in emerging markets. Cigarette manufacturer Gudang Garam of Indonesia has returned the Future Fund 50% since it was acquired; Souza Cruz of Brazil has returned 28%.

The truth, though, is that with a total portfolio value of $210 million cigarette makers are not going to make much difference to the overall investment returns of a $77 billion operation.

As chairman, the highly regarded Gonski could simply volunteer that the Future Fund quit the tobacco business in the same way it has recently excluded investment in cluster bomb makers, a particularly pernicious sub-set of its wider armaments portfolio.

So far though, there is very little evidence the new chairman — a former board member at St Vincent’s Hospital in Sydney — is thinking that way.

*This article was originally published at Business Spectator