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Future favourable for index funds.
Date: Wednesday, 13th June, 2007. Source: The Australian Financial Review. Author: Jonathan Barrett.
Index funds are expected to fare well in the upcoming Future Fund beauty parade as investment houses compete to grab a slice of the $50 billion-plus portfolio.
Future Fund chairman David Murray said funds would be lined up in the next six months and any manager professing an ability to beat markets would have to provide ample proof it could do so.
“If I were just leaving school, I’d invest in an index product provided the fees were right,” Mr Murray said after an Australian British Chamber of Commerce lunch in Sydney yesterday.
Index funds, which aim to replicate the sharemarket’s performance, generally charge much lower fees than active funds, whose goal is to outperform the index.
The comments will excite index managers, which claim market-linked funds provide the best long-term way to boost account balances as active funds rarely top performance tables for long.
The Future Fund was created to meet unfunded government super liabilities projected to reach $140 billion by 2020, and will start investing in one to two years.
Future Fund mandates are highly lucrative as funds charge fees based on the amount of money they manage, and large contracts are expected to be on offer.
Earlier, Mr Murray told the lunch the public servants’ fund would seek cheap sources of beta, or market returns, and very specific reserves of alpha, or returns above the market index.
“What we are looking for will be the cheapest beta risk we can find in the market, and on top of that, reliable alpha,” Mr Murray said. “Alpha is a zero-sum game, but a negative sum game after you subtract fees, so to buy reliable alpha to deepen returns will be our objective.”
The Future Fund differs from most investment managers as it does not have to provide liquidity to investors cashing in their funds. This reduces transaction costs and allows it to take a longer-term investment approach.
Mr Murray declined to pass judgment on Telstra’s threat to cancel plans for a high-speed broadband network if certain conditions weren’t met by the federal government, despite the Future Fund being a substantial shareholder with a 17 per cent stake.
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