Update No. 90 – 14/12/12

You can now follow me on twitter @EGPtony I will probably be an infrequent tweeter, but will try to let quality rule over quantity.  From next year, I will ‘tweet’ the EGP Fund No. 1 price per share & how we’re going against the benchmark and a link to the blog each week after I post the blog.

The family and I leave for the UK on Monday night.  As always when traveling, it is my expectation that the updates will continue unhindered, I will try to keep you informed in the usual ‘seamless’ fashion.  I expect to make updates on a Friday night or a Saturday morning (UK time) and I will check my e-mail every evening.

Before I go, I will direct you to the most horrifying news article I’ve read in quite a while.  I jest of course, there are much worse things going on in the world, but an Australian taxpayer should find the article pretty troubling.  The Future Fund seems to be spending close to 1¼% annually managing our assets.  The most basic premise of a very large fund is that scale will reduce costs.  Spending about one BILLION dollars of taxpayer money managing only about $76B in assets is appalling in my view.  We can only hope that much of the management cost involved in FY2012 was one-off in nature acquiring ‘long-lived’ assets, from which substantial future returns will be generated with minimal additional future management costs. This $76b is tiny on a global scale, the top 5 SWF in the world command about $2.8 trillion in assets. Apparently the Norwegian SWF carries stock in 8200 list companies and this makes up only 60% of their portfolio, now that’s what I call diversified!  Although they have that ridiculous level of diversification, they do seem to manage their funds for about a 0.1% MER (Management Expense Ratio), or approximately 1/12^th of the FY2012 Future Funds MER.

The FY2012 Future Fund Annual Report (pdf) indicates that since inception in mid-2006, the fund has averaged 4.7% per annum returns.  Interestingly, they ‘strip-out’ the ongoing sell-down of their Telstra holding in this result, which given they were the primary seller when share prices bottomed I would hazard would punish the result meaningfully. This 4.7% annually is not a bad result it must be noted – the Australian market when dividends are added back in is only up a few percentage points in total (i.e. rather than per annum) over the same period.  It should also be remembered though, that the fund had the substantial advantage of receiving & deploying the majority of its funds as markets declined through the GFC, so in my view, a better assessment of how well they’ve performed would be the last 2 or 3 years when they were more fully deployed. In this period, they were up 27.4% or about 8.4% per annum.  The ASX200 TR index was only up about 20% through the same period, so again, it is hard to criticise this result, particularly given the size of the fund and its fairly conservative asset allocation and the stated focus on a  pretty modest target of CPI + 5%.

The fund is about 10% in cash, or if we count ‘debt securities’ as ‘cash’ about 30% in cash, just under 40% in equities and just over 30% in ‘tangibles & alternative assets’ so performing against an all equities benchmark will be difficult when the market is rising at closer to its historic rate, but it has to be said you would be a pretty hard taskmaster to find fault with the performance since the fund was established.

This does not mean that we should idly allow the Australian taxpayer to become the new bloated fee source the financial industry.  There should be no reason why all management of the Future Fund, including payments to all internal and external agencies should ever exceed about ½% given such a substantial asset pool (I would have thought 0.2% was quite achievable to be honest…).  I will be keeping my eye on this as an interested taxpayer over the coming few years. If they can continue to perform as well as they have compared to the Australian indices, the Future Fund will be a very useful asset for the average ‘Future’ Australian – provided they reign in the fee costs.  I don’t particularly agree that it is an area the government should be involved in, but it could be advantageous to have a large natural owner (or co-owner) of good long-lived infrastructure assets as there is no developed nation as starkly in need of infrastructure development as Australia – Tony Hansen 14/12/12

EGP Fund No. 1 Pty Ltd. Up by 15.59%, leading the benchmark by 1.04% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 19.05%, leading the benchmark by 16.48% all-time (April 1^st 2011).