The Federal Government has given the Future Fund green light to manage selected Australian infrastructure and property assets in-house
The Future Fund Board has received approval from the Federal Government to manage certain assets internally without an external investment manager involved.
This is a break from a long-standing policy that the fund has to use external managers to manage its investments.
“With our increased focus on domestic real asset exposures, the Board sought and has received approval from the Government to undertake Australian infrastructure and property sector transactions and to manage assets without an external investment manager,” Greg Combet, Chair of the Future Fund, said at a presentation at CEDA in Sydney today.
“This is a noteworthy change from the long-standing obligation to exclusively utilise external investment managers. To undertake internal management the Board must obviously be satisfied that we have the right resources, skills, processes and technologies and that such a move is cost efficient.
“But this additional capability is intended to help access new opportunities in Australian infrastructure and property that we might otherwise be unable to access efficiently, or which external managers may not be focused on,” he said.
External Management – Obligation or Policy?
Although the Future Fund has always invested through or alongside external managers, there seems to be some confusion about whether the Future Fund was actually legally required to use external managers for its investments.
The Frequently Asked Questions section on the fund’s website states that parties should not apply for funds from the Future Funds, since “we are required by legislation to invest only via external investment managers and as such we do not assess individual investment opportunities”.
And it is often mentioned that the Future Fund Act of 2006 lays out the requirements for the fund to use investment managers, even in the fund’s own annual report.
But the Future Fund Act of 2006 doesn’t explicitly state that the fund has to use external managers, but simply that it ‘may’ engage one or more investment managers. Previous Future Fund Investment Mandate Direction documents are also silent on the matter.
External managers are mentioned in the Investment Fund Legislation Amendment Bill of 2021 which explains that:
The Future Fund Board decides how the funds are to be invested, while the Agency, through external investment managers, ensures that the funds are allocated consistent with those decisions
But this passage seems to be descriptive of the state of affairs at that time, rather than mandate the use of investment managers.
[i3] Insights understands that the decision to manage certain assets in-house did not require amendment of the 2006 Act, but merely government approval, which seems to confirm external management was never a requirement under this legislation.
Expanding Co-investment Activities
The Future Fund already holds direct investments under partnerships and co-investment arrangements, but in these transactions external managers have always been involved.
Combet said the fund is increasingly doing more co-investment deals.
“We are also increasingly using co-investment sleeves that allow us to increase our exposure to select assets without the additional fees that would ordinarily be paid,” he said.
At the CEDA presentation, Combet emphasised that the decision to manage Australian infrastructure and property assets in-house would not dramatically change its use of external managers.
“We do not anticipate a significant shift away from the way in which we partner with our external managers. We continue to recognise the benefits these partnerships bring in terms of insights and skills and our ability to remain focused on the overall portfolio,” he said.
Instead, Combet spoke of an ‘optionality’, which would help the fund think more deeply about the assets it invests in and help reduce investment management fees.
“The capacity to be able to make transactions and manage investments internally will increase our flexibility and reinforce our focus on value for money and is a further example of how we continue to evolve the way we invest,” he said.
[i3] Insights also understands that, from time to time, the Future Fund identifies assets in Australia that do not necessarily fit comfortably within the existing strategies of external managers.
But rather than establishing a new fund or developing a new capability with an external manager, internal management will now allow the fund to access these opportunities more effectively.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.