Australia’s Future Fund to Buy $2 Billion of Infrastructure Assets

The deal includes stakes in major domestic and foreign airports, further swelling the sovereign wealth fund's infrastructure allocation.

(August 24, 2012) – Australia’s sovereign wealth fund has reached a deal to acquire all of the assets belonging to an infrastructure investment firm, including stakes in airports in Perth, Melbourne, Queensland, and Germany. 

“Australian infrastructure assets are attractive to the Future Fund because of their strong correlation with Australian economic growth, inflation protection and relative high levels of earnings certainty,” said David Neal, the sovereign wealth fund’s chief investment officer, in a statement. “These characteristics provide a strong fit with the fund’s mandate to achieve high, risk adjusted returns over the long term.” 

The $2.08 billion bid represents a 22% premium on the most recent closing price of Australian Infrastructure Fund Ltd., which trades on the Australian Securities Exchange. The Future Fund has already more than doubled its allocation to infrastructure over the last three years, from 2.5% to 5.6% of the $80 billion fund. 

“Over the last five years, the Fund has been building its Tangible Assets program. The infrastructure program is part of that and is now valued at over $4.3 billion,” said Neal. “We continue to seek opportunities to increase our exposure to quality Australian and international infrastructure assets.” 

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The deal centers on a number of airport assets, including a 30% stake in Perth airport, 12% in Melbourne’s airport operator, 49% in Queensland Airports, and 5% of Athens and Hamburg airports. The Future Fund, meanwhile, already owns 17% of Melbourne Airport. 

With low volatility, long-term returns and a (disputed) reputation for inflation hedging, infrastructure is an attractive asset class for major funds at the moment. As federal stimulus money dried up, policy experts have called on the US government to encourage foreign sovereign wealth funds, such as the Future Fund, to invest in US infrastructure. American public funds already allocate largely to domestic projects, while Canadian pensions have taken a liking to Australian infrastructure.  

“In general, pension funds and institutional investors are investing in infrastructure because of the profit profile: it’s got very stable yields,” Rich Nuzum, Mercer’s head of United States investments, told aiCIO in January. “If you’re a long-term investor who doesn’t need a lot of liquidity, it’s a very attractive investment, we think…Institutions who are willing to invest in infrastructure globally, we think, are going to continue to get very attractive returns as they have in the past.”

San Francisco Pension ‘Under No Obligation’ to Follow Jury Directives

A civil grand jury’s scathing report on the San Francisco’s employee pension system has no legal sway over its investment strategies, according to the former president of the California Grand Jurors’ Association.

(August 24, 2012) – A San Francisco jury can tell the city’s employee pension system to change its “volatile and risky investment policies,” but according an expert in the state judicial system, the fund does not have to listen. 

Or, more specifically, San Francisco Employees’ Retirement System (SFERS) board members have to listen and respond to the jury’s report, but are under no obligation to follow its advice. 

“The grand jury has no authority to enforce its recommendations,” Jerry Lewi, a long-time officer and former president of the California Grand Jurors’ Association, told aiCIO. “Their conclusions are strictly that: recommendations. But the power of persuasion is very significant, and a large portion of jury recommendations are accepted.” 

A 19-member civil grand jury investigated SFERS in reaction to weak returns and losses over the last five years, and its concluding report rails against the fund’s investment policies and decision not to undertake a formal “‘failure analysis subsequent to the funding loss suffered in 2008-2009.” The jury, which Lewi said is “made up of people from all walks of life,” issued a list of six recommendations for the SFERS’ investment team, including a lower rate of expected return, greater transparency and openness, more thorough risk analysis and “less volatile and risky investment policies that would attain sufficient returns” for members. 

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Lewi acknowledged that jurors are “not expected to be experts” in the subject they are investigating. “I would find it hard to think that a grand jury could make specific investment recommendations. If a report said, ‘You should be investing in stocks instead of bonds,’ it would not be appropriate, in my judgment.” 

While the jury’s advice is not legally binding, it does engage closely with questions of risk analysis and asset allocation. Lewi said the pension board is legally bound to answer each piece of advice by agreeing, proving its already been integrated, requesting more time to study the recommendation (to a maximum of three months), or refusing and defending why. 

SFERS is in the process of reviewing the report and preparing its responses, according to a statement. 

In California, a civil grand jury can investigate any municipal or county pension fund as often as it would like. Nevada is the only state with a similar, albeit less powerful, system.

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