Another common topic of Future Fund speculation is its relationship with asset consultant Watson Wyatt, a subject spiced up by the fact David Neal ran the firm’s Australian operations before taking the big CIO role. Paul Costello clarifies that the relationship with Watson Wyatt was always intended to change over time. “When I arrived here, I had to think immediately about what role external advisors would have with the Fund, because it was a clear expectation that we would invest in an internal capacity to a material extent. Watson Wyatt was extraordinarily useful in those very early days and months, helping to put in place the broader structure of the portfolio, strategic asset allocation and capital markets research and so on, assisting the board and then myself.
That role has changed a great deal over the last year – this process is now led by the internal team and always will be, but we continue to see great value in having a contest of ideas, people against whom the internal team can contest a perspective.” Neal reveals that during 2007/08, the Future Fund in fact reached out to new external advisors. Among them are Wilshire Associates for private equity manager research, and Albourne, the UK-based creator of the online ‘Albourne Village’ of 50,000 hedge fund and private equity market participants, for hedge fund manager research.
“We’ve got an internal investment team which is relatively small given what we have to cover, somewhere just above 20, and it’s pretty top-heavy too if you look at it – it’s certainly not a pyramid, if anything it’s the other way around,” Neal says. “The reason for that is we wanted a highly informed, highly talented team internally covering all of the different disciplines, so we could have a really strong focus on strategic portfolio construction. How do you decide whether you want to go and buy more infrastructure or more corporate debt, if you don’t have a broader team working closely together?”
Debt is indeed much on Neal’s mind. He considers that active positioning in the asset class is a “bigger fish to fry” than Australian equities at the moment. “We’re particularly attracted to what’s going on in debt markets. Credit is attractively priced, you need some pretty detailed work done on the underlying credits but there’s some interesting risk-adjusted returns there, we think.” Apart from Australia’s liquidityhungry banks, PIMCO Australia has been another early beneficiary of this view, through a credit mandate. The short road from idea to implementation is one Neal attributes to the uncomplicated and collaborative decision-making structure.
