Not since the STA and ARF merged to form AustralianSuper have the eyes of our industry been so firmly focused as they were on the Future Fund this year. And funnily enough, it was a former boss of STA, Paul Costello, in the hot seat.

The general manager of the Future Fund and his chief investment officer, David Neal, had been leaving it to their chairman, David Murray, to make most of the public comments on investment philosophy. That is, until they sat down with MICHAEL BAILEY to tell the story behind their world-beating return of -0.2 per cent for the first fifteen months of operation.

In the following pages, Costello and Neal talk about the Future Fund’s unusual way of defining investment categories, its prioritisation of asset classes and the external advisers it’s using to research managers, and their opinions of everything from alpha/beta separation to securities lending. They also had a sobering message for hedge funds awaiting the November 20 expiry of the escrow on their two billion Telstra shares.

The Future Fund doesn’t want size and complexity to go hand-in-hand. It’s why the largest fiduciary fund in Australia recognises just four non-cash asset classes. “The breadth of each category is really about wanting competition for capital in our portfolios,” says chief investment officer David Neal, in a statement which won’t be news to managers vying for an appointment at 120 Collins St, Melbourne.

Neal agrees that the anointment of ‘infrastructure’, ‘hedge funds’ and so on as asset classes with prescribed target allocations has helped push up prices to investors, and just as importantly has lead to some opportunities falling between the cracks. “There’s a whole range of what we’ve called ‘tangible assets’, where the return basically comes from the yield on a physical asset and is linked to inflation to some degree – it might be a building, infrastructure, utilities. We wanted those things to compete with each other, it doesn’t make sense to have infrastructure in the portfolio if it’s expensive and property’s cheaper,” Neal says.

The chief investment officer also argues that the more delineations there are in the portfolio, the more chance there is something will fall between the cracks. “You’d say something like agriculture probably hasn’t been looked at much in the past, because it wasn’t called something you could fit in real estate and then it didn’t fit in infrastructure – I’m not saying we’re out there buying a lot of farms – but certainly in my career there have been lots of interesting investment ideas which have popped up but it doesn’t really fit in anybody’s bucket, and all of a sudden it doesn’t get addressed by anybody.”

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