Timber the next new thing for Aussie sovereign fund

The A$66 billion ($58 billion) Australian sovereign wealth fund, the Future Fund, is doubling its allocation to “tangible assets” and will soon make its first allocation to the timberland sub-asset class.

The Future Fund, which was established in 2007 with an investment horizon to 2020, has been taking advantage of the global financial crisis with allocations to a wide range of distressed debt and equity investments.

According to the general manager, Paul Costello, the fund is now settling down to a period of more sustainable but lower growth as the world gradually recovers from the crisis.

The “tangible assets” part of its portfolio is being increased from 3 to 6 per cent, with the fund studying the addition of timberland investments. To date, the tangible assets have included real estate and infrastructure only.

Costello told a conference this week that the Future Fund had been putting in a lot of work on tangible assets which so far have been solely real estate and infrastructure. “We’ve recently begun looking at timber as an opportunity,” he said.

Costello detailed changes over the past year during which the fund’s allocation to cash has been reduced from 45 per cent to about 15 per cent.  Most of the difference has gone into listed equities and also increasing the alternatives program from 3 per cent to 12 per cent.

The fund, which had allocated 25 per cent to credit as part of its very early stage program, was looking to wind this back to a longer-term allocation of about 20 per cent.  In answer to a question to the floor, Costello said that the fund was very interested to team with like-minded investors overseas, particularly for investing in some unlisted markets where institutional investors had not been as well-served by managers as they had in listed markets.

Recent purchases of direct assets include a 10 per cent stake in Melbourne Airport, a shopping centre in Perth and a one-third ownership of a shopping centre in the UK.  He said the fund was interested in making further overseas investments of “regulated assets”, such as Water UK.

It has now been investing “proper” for two and a half years and has a total of $58 billion (including $3.82 billion of Telstra shares, plus the $17.4 billion it manages under a low-risk mandate in the government’s three national building funds). Costello said the fund was entering a slower growth period which would be “the real test” for the board and management.  He said total staff was currently about 70 and he expected this to reach 75 to 80 over the next six months.