greg_bright.jpgIf there were any lingering doubts about the early conservatism of the Future Fund, the annual report published October 20 should put those to rest. The report reveals that six big mandates were awarded to international alternatives managers prior to June 30 as well as confirmation of the appointment of some traditional active managers both in Australia and overseas. The alternatives commitments are particularly interesting.

They are: US$164 million in venture capital; US$500 million in distressed situations; 100 million euro in mid-marketbuyouts; US $100 million in Asian real estate; 180 million euro in European real estate US$500 million in multistrategy debt. About A$42 million had been called by the managers at the end of June, with an outstanding A$1.735 billion to go into these collective investment vehicles.

The report details the target asset allocation of the fund as: 35 per cent in equities (including private equity); 30 per cent in ‘tangible assets’; 20 per cent in debt; and 15 per cent in alternatives. There is no target allocation to cash. The fund includes property, infrastructure and utilities – either listed or unlisted – in ‘tangible assets’ and commodities, insurance-based strategies and skill-based absolute returns strategies in its definition of ‘alternatives’.

With 62 per cent of its money still in cash at the end of June, the fund probably has a long way to go to reach its target allocations, except in equities where it had 28.9 per cent (target 35 per cent) at the time. The report says that the fund’s strategy to take advantage of the current credit crisis was to consider investments in broad categories with common characteristics rather than distinct asset classes, thereby minimising the risk of overlooking attractive investments which may not fit the narrow definition of approved asset classes. The Future Fund is following the now well-trodden path of the successful US endowment funds in a number of respects.

The most important of these is to build in-house expertise in certain areas, particularly unlisted markets, and invest with greater confidence in those areas. The endowment managers say they do not go into illiquids and alternatives that they do not understand well, which is a lesson for all funds which attempt to follow in their wake. To date, the Future Fund management has not put a foot wrong. Sure, it had some luck by insisting that the core management team needed to be in place before it started to invest in growth assets. This coincided with the credit crisis and the fund executives decided to delay going into the equity markets.

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