If 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.
The country’s biggest single investor became the country’s biggest lender. But the annual report reveals that the fund is getting set with its investments, adopting both an opportunistic and a strategic approach, slowly, and in the process rewriting the text book for how an Australian super fund – most of which have similar liabilities profiles – should address its investment strategy. It’s not about following Access Capital’s client funds into alternatives. That was yesterday’s (good) news. This is about constructing a new type of portfolio which blends a bunch of lowly correlated assets, a lot of illiquids, a few interesting new investments, and some traditional assets in a way which will deliver an outcome. The Future Fund will probably reach its goal of $130 billion by 2020 with several years to spare.
AUSTRALIAN MANAGER S OUTSTRIP GLOBAL COUNTER PAR TS
The top 15 Australian funds managers saw their funds under management rise by an average of 19 per cent last calendar year, which was just over twice the growth rate for the rest of the world. Those 15 managers are the ones which made it into the top 500 in the world, by assets, according to the latest Watson Wyatt/Pensions & Investments annual survey.
The global growth rate of 9 per cent was the lowest it has been for five years and the largest of the global firms – the top 20 – grew by only 6 per cent, compared with a growth rate of 23 per cent in 2006. The top 20 managers still account for about 38 per cent of the US$69 trillion for the top 500 overall. The markets tend to drive FUM around the world but Australia has the obvious advantage of the Superannuation Guarantee underwriting the growth rate.
In times like these one has to wonder whether the industry as a whole is doing the right thing by Australian workers. The industry has done very well out of the SG. A lot of fund managers, planners and other service providers have made a lot of money because of the compulsory savings. So, when the markets deliver a once-in-a-generation shellacking it is only natural to expect some questions about the managers’ role in the process. Industry funds, for instance, have taken the opportunity to step up their campaign to have commissions banned from advice associated with SG super.
Funds and consultants are redoubling their efforts to squeeze fees. As Dick Elden, the former hedge fund of funds manager who now runs Lakeview Investment, an activist fund of funds, said last month: “almost every hedge fund in the world is now open”. The Watson Wyatt survey shows those managers which have attracted assets have offered liability-driven investment strategies and products, which have been very popular with defined benefit schemes in the US and UK, or have had diverse product ranges. Quant and value managers also did well in the survey period.
According to Hugh Dougherty, Watson Wyatt’s Australian head of manager research, many funds are habitually looking at alternative ways of accessing cheap beta. Passively managed assets grew by 16 per cent in 2007, and a cumulative 19 per cent a year since 1996. In the overall rankings, Barclays Global Investors overtook State Street Global Advisors as the world’s largest manager, with US$2.078 trillion as at December last. SSgA had US$1.979 trillion at the time, followed by Allianz with US$1.957 trillion.
