Interpac Business and Migration Solutions Melbourne Australia

(September 21, 2010)

AUSTRALIA'S Future Fund poured billions of dollars into US hedge funds and developed markets last financial year, despite the poor economic outlook for those regions, with smaller increases in property and infrastructure investments taking its total asset pool to $67 billion.

The Future Fund appointed nine US-based and one British-based boutique hedge funds to manage $9.8 billion during 2009-10, up from $2.6 billion in June last year.

More than 15 per cent of assets are now invested in the ''alternatives program'', which the fund described as using ''skilled managers to take advantage of capital scarcity and market inefficiency''.

The Future Fund still owns 10.9 per cent of Telstra and had a return of 6.7 per cent on $4.2 billion of shares, including the profit from selling 684 million shares in August last year.

The fund generated an overall return of 10.6 per cent last financial year, compared with average returns of 11.19 per cent for funds with similar assets, according to investment researcher Morningstar.

The fund lost 1 per cent between March and June as the Greek debt crisis and concerns about a second recession in the US shook international markets.

''Improved market confidence through the year has seen performance pick up, albeit that the outlook for global markets remains fragile in the aftermath of the global financial crisis,'' Future Fund chairman David Murray said.

''The listed equities exposure was built as markets demonstrated some recovery from the volatility of recent times, but the design of the portfolio means we are less reliant on equity markets to generate returns than many other investors.''

The Future Fund was set up in 2006 with a mandate to invest government funds and profits from the sale of Telstra to pay for public sector pensions and superannuation after 2020.

The Finance Minister is expected to release the board's annual report by October 31.

Up until this year, the fund had retained large cash holdings in its asset portfolio, waiting for global markets to steady following the financial crisis in late 2008. The cash holding decreased from $22.2 billion in June last year to $8.2 billion this year.

Property investments increased from $757 million last year to $3.12 billion and were expected to provide steady long-term returns.

The fund has $23.2 billion invested in equities, with a third in Australian equities and the rest in European and North American markets.

The Future Fund also manages $20 billion of funds set aside for infrastructure, education and hospitals. These funds returned 4.6 and 4.7 per cent against a benchmark of 4.2 per cent, and the government withdrew $2.46 billion for projects.

The fund's investment in developing markets remains about 3 per cent of assets, even though other fund managers see developing countries as key growth areas in coming years.

AustralianSuper has 40 per cent of global equities allocated to emerging markets, its chief investment officer, Mark Delaney, said.

(Source:theAge)