Future Fund: Fight on for Aussie’s future prizes

The fund has A$60 billion ($52.4 billion) under management but has yet to do much with it: at June 30, when last disclosed, 75% of the portfolio was in cash. That figure becomes 91% if a slab of 2.1 billion Telstra shares, inherited from the state during the T3 privatization sale in February and to be held in escrow until 2008/09, is excluded.

Much of the fund’s activity since its official formation under the Future Funds Act in April 2006 has been in getting the logistics right. It hired David Murray, the former head of the Commonwealth Bank of Australia, as chair; added Paul Costello, who previously ran the New Zealand Superannuation Fund, a comparable sovereign wealth institution, as general manager; and then brought in David Neal from investment consultant Watson Wyatt – which had in turn been hired to advise on allocation and strategy earlier – as chief investment officer. In terms of investing, the fund has until June 30 2008 to lay the foundations of a long-term programme, and it won’t be until the following year that it starts being judged on performance. From then on, it will be expected to return the consumer price index plus 4.5% to 5.5% a year over the long run.

Early indicators are interesting but potentially misleading. On June 30, $1.85 billion was in Australian equities other than Telstra, and $2 billion in international equities; if the fund were to continue with a bigger allocation to global than to local stock it would be a trailblazer among home-focused Aussie institutions. But the fund’s one investment report to date points out that "the split between the Australian and international equity markets should not be seen as indicative of our policy. Rather it reflects opportunistic buying in the short window of time between commencing investing and the end of the financial year." In fact, Australian stocks are likely to be a mainstay, since they grant the fund a full credit for company tax on dividends.

Like other sovereign wealth funds, it is likely to take advantage of its sheer size and long-term horizons (no cash can be withdrawn until 2020) to take a close look at the private markets. The fund describes this, and the building of both internal skills and external partners in this area, as "a priority" for the coming year.

In the fiercely competitive world of Australian fund management, the exact allocation, and the likely process of awarding mandates, is a subject of some contention. Even in the A$1 trillion Australian superannuation industry, among the four largest such markets in the world, a A$60 billion fund is a big prize. "We’ve been keeping the phones pretty busy in Melbourne [the fund’s head office]," says a Sydney-based fund manager hoping for an Australian equities mandate. "We hear they’ve been giving some mandates selectively but have been managing some themselves internally in an index structure."

The other puzzle is what happens to the vast Telstra overhang once the fund is allowed to sell it. Although it’s an issue for the fund managers, it’s also a matter of considerable interest to the 1.4 million individuals who hold shares in Telstra. Many of them, especially those who bought shares in the second sale of Telstra shares in 1999, have already found investment in Telstra to be a chastening experience; the idea of a 2 billion share dilution around the corner is unlikely to improve their mood.