Mandate: Consumer Price Index plus 4% to 5% per annum over the long term with an acceptable
but not excessive level of risk.

Earnings for 2018-19: $16.8 billion

Return 2018-19: 11.5%

Earnings since inception: $102.1 billion

Return since inception: 8.2% per annum

Cash flow history at 30 June 2019:

Asset allocation at 30 June 2019

Investments by geography at 30 June 2019

Cumulative returns at 30 June 2019

Interpreting the Investment Mandate

The Future Fund’s initial Investment Mandate was issued to the Board by the responsible Ministers in May 2006.

Until 30 June 2017 the Fund’s Investment Mandate was to achieve an average annual return of at least the Consumer Price Index (CPI) + 4.5% to 5.5% per annum over the long term with an acceptable but not excessive level of risk.

A new Investment Mandate came into effect from 1 July 2017, which reduced the long-term benchmark return target to CPI + 4% to 5% per annum, reflecting the changed investment environment.

The return objective must continue to be pursued with acceptable but not excessive levels of risk.

The Fund’s Investment Mandate is available at Appendix B.

As the Board pursues the Investment Mandate, it is also required to conduct itself in a manner that:

• is consistent with international best practice for institutional investment
• minimises the impact on the Australian financial markets
• is unlikely to cause a diminution of the Australian Government’s reputation in financial markets.

In balancing the risk and return aspects of the Fund’s Investment Mandate, our primary objectives are to:

• maximise the value of the Fund over the long term, which we define as rolling 10-year periods
• minimise the risk of significant capital losses along the way, with a particular focus on expected downside outcomes over rolling three-year periods.

There is a natural tension between these two objectives, and our investment policy framework has been designed to guide resolution of issues like this by formalising our approach to investment risk management in portfolio construction. This framework, along with the broad investment process, are described in greater detail in the ‘How we invest’ section of this report.

While we publicly report and discuss the performance of the Future Fund at a high level each quarter, outcomes over these short periods of time are not appropriate indicators of the likelihood of achieving the outcomes set out in the Mandate over the long term.

We explicitly reject the concept of ‘peer risk’ (the risk of underperforming other institutional investors over the short term) as being inconsistent with the mission and Mandate of the Fund. However, we appreciate that comparisons between the Fund’s return and the returns of other funds with similar objectives, both locally and globally, are valid over the longer term.

Feature article: Delivering returns while managing risk

As Australia’s sovereign wealth fund, we recognise the responsibility and the challenge of investing the Future Fund on behalf of future generations of Australians.

The Investment Mandate of the Future Fund is to adopt an average return of at least Consumer Price Index plus 4% to 5% per annum over the long term, while taking ‘acceptable but not excessive risk’.

As we invest the assets of the Fund, we are highly focused on balancing these risk and return objectives.

The Future Fund has exceeded its benchmark target and been well within its risk tolerance. Over 10 years the fund delivered 10.4% per annum, exceeding its benchmark of 6.5% per annum.

The challenge is to deliver strong returns while avoiding excessive risk. There are two key elements to it: opportunity selection and dynamic portfolio management.

Focusing on the best opportunities

Since the Future Fund was established it has focused on constructing a portfolio that can be as efficient as possible at turning risk into return.

Our team collectively channels its best ideas, irrespective of asset class, up to the total portfolio to achieve the Fund’s investment objective. The intention is to uncover the best investment opportunities across all sectors. We avoid fixed asset allocations which we view as likely to constrain our thinking. Instead, we adapt our approach as circumstances warrant.

We bring together the top-down economic and market views and bottom-up asset class insights –we call this being joined up. It is the cornerstone of our investment philosophy, and we further consider it a key comparative advantage that significantly improves our prospects of meeting the Future Fund’s Investment Mandate. Our top-down people look at the global economy, financial markets and political risk, and think about how this will impact the portfolio. Our bottom-up people look across the world for great assets, thinking about whether there is enough reward for the risk that is required.

By setting the big picture against local insights we generate a rich and nuanced view of the opportunities and outlook and seek out the best investment ideas for the targeted risk and return objectives in a given investment environment.

Dynamically managing a diversified portfolio

We aim to build a highly diversified portfolio that is as robust to as many plausible future outcomes as possible.

We look right through the portfolio to understand the return drivers of all the assets that we have and make sure that we’re blending those in the right proportions to avoid excessive risk.

As well as accepting broad market risk we seek out opportunities where we can generate additional returns through skill and investment insights. Those skills can be in any asset class across the portfolio. For example, we have a substantial exposure to credit because it offers diversifying exposure and an opportunity for a skilled manager to add returns.

Prospective returns and risks change through time, so we manage the portfolio dynamically. We expect to increase risk levels when the expected reward for taking risk is high and to reduce risk levels when the expected reward for taking risk is low.

Risk positioning

Based on its interpretation of the Investment Mandate, the Board has an appetite for material levels of risk in the Future Fund. Nonetheless, in accordance with our investment process we aim to build a portfolio with some degree of resilience to the investment environment. We seek genuine diversification that achieves greater balance in portfolio construction while allocating risk in a flexible and dynamic manner.

Our view is that real discount rates for risky assets are low and cash flow growth is expected to be positive but moderate over the long term, so expected real returns are below average relative to history. When we adjust these returns for risk, then the expected reward for taking more risk than we do at present is relatively unattractive. This trade-off is illustrated in stylised form in the chart below.

Our outlook on the global economy and markets is explored in more detail in our investment environment report on pages 32-33.

The broad focus of our portfolio construction in 2018-19 has been to:

• Retain high levels of portfolio flexibility to both withstand and potentially take advantage of any market dislocations that might arise.
• Be opportunistic and skill-based. Internally, and through our external investment managers, we aim to add additional return, or reduce risk, through the application of skill. Strategies that have low correlation with risk assets are particularly attractive (such as hedge funds, early stage venture capital and alternative risk premia).

Measuring risk

One of the primary metrics we use to understand and manage the broad market risk exposure of the Future Fund is Equivalent Equity Exposure (EEE).

EEE estimates the amount of market exposure we have when looking through the whole portfolio.

Our EEE range for the Future Fund is 45-65. The average EEE in 2018-19 was 54 and at 30 June 2019 the EEE stood at 56, which is slightly above neutral.

The chart above demonstrates how the EEE of the Future Fund has changed through time.

In 2017-18 the Future Fund’s structural risk was increased to reflect the reduction in expected returns due to the market environment and the Government issuing a revised investment mandate. As a result, the normal operating risk range shifted from 40–60 to 45–65.

We are currently in the fifth distinct risk-taking regime for the portfolio since it was established.

1. Soon after inception in 2006, the build of the Future Fund portfolio was suspended in late 2007 due to concerns over financial stability and the sustainability of high asset prices, and a very low risk profile was maintained into the global financial crisis.
2. Portfolio risk exposure was increased as extraordinary and globally coordinated economic policies were implemented to fight the crisis.
3. Risk levels were raised further as the European crisis subsided and the President of the European Central Bank, Mario Draghi, committed to ‘do whatever it takes’ to underwrite the integrity of the Euro.
4. As expected returns declined (given strong market performance supported by low interest rates), portfolio risk was gradually reduced to moderately below normal levels.
5. Risk levels were increased towards more normal levels, reflecting the emergence of strong economic growth and corporate earnings and central banks signalling an extension of accommodative monetary policies, together with the decision to increase the Fund’s structural risk appetite.

Investment Reviews

Listed equities

Strategy

The objective of the Listed Equities portfolio is to provide a liquid exposure to equity markets that generates attractive risk-adjusted returns over the long term. The portfolio structure has been tailored to benefit the risk-return profile of the total Future Fund via an enhanced beta sleeve for harvesting risk premia and a complementary alpha sleeve for accessing active manager skill.

The enhanced beta sleeve systematically harvests equity risk premia through exposure to factors that compensate for undiversifiable risk. The alpha sleeve complements this approach by investing in a skill based (stock picking) portfolio, targeting uncorrelated returns from equities management.

The opportunity set for the Listed Equities portfolio includes:

• Australian, developed and emerging markets
• physical and synthetic equity-related investments.

Report

The Listed Equities portfolio was valued at $57.9 billion as at 30 June 2019. The portfolio, as a percentage of the total Future Fund, has increased from 32.1% at 30 June 2018 to 35.5% at 30 June 2019. This increase in allocation was implemented across all major regions, with a notable increase to emerging markets, reflecting attractive valuations. Our portfolio remains concentrated in global developed markets, while we continue to hold meaningful exposures to Australia and emerging markets.

Within the enhanced beta sleeve, we have refined the implementation of each sub-strategy. During the year, we further diversified our allocations to achieve a more robust balance of long-term equity factor premia and risk. We continue to maintain a defensive core via our exposure to high quality and value risk premia.

Within the alpha sleeve, our long/short portfolio continues to maintain a low exposure to equity market risk and an emphasis on stock picking skill. During the year, we increased our exposure to a number of high quality sector specialist strategies that we believe are particularly well placed in today’s environment to generate equity alpha and provide niche exposures for the total Future Fund.

We believe it is important that risk premia are captured and implemented efficiently. We continue to work closely with select partners to help ensure a balanced risk premia exposure for the aggregate portfolio is achieved.

Sector exposure at 30 June 2019

Region exposure at 30 June 2019

Alternatives

Strategy

The Alternatives portfolio is designed to provide a return stream to the Future Fund that comprises a combination of active management skill based strategies and exposure to other diversifying risk premia. The returns of the portfolio should have little to no relationship with those produced from the other portfolio sectors or capital markets in general.

The opportunity set includes:

• a broad variety of specialised active management strategies within traditional asset classes
• exposure to ‘alternative’ or non-traditional risk premia such as momentum, volatility and insurance
• other managers or mandates which do not align well with the principal sector strategies.

The mandate flexibility of such strategies increases the Fund’s exposure to diversifying active management return. We address the complexity and breadth of the Alternatives portfolio through a hybrid approach of direct manager relationships supplemented by activity with investment platforms operated by a handful of strategic partners. These partners act as an extension of our team and provide us with operational leverage.

We recognise that active manager skill is scarce, but also valuable as the ability to capture skill helps maximise the risk-adjusted performance of the total Fund. We take a value based approach to evaluating the costs of acquisition of such return streams – that is, management and performance fees. Our activity is centred on finding the right balance between identifying and accessing managers, strategies and organisations which can persistently add value while testing the market for more economic access points to the same or similar pattern of returns.

Report

At 30 June 2019 the Alternatives portfolio was valued at $22.0 billion, representing 13.5% of the Future Fund.

After significant change over the last five years, new manager investing activity has come down and the focus is on maximising high conviction core relationships as well as identifying outstanding new opportunities.

The portfolio largely delivered on its objective, providing positive returns while also offering significant protection to unexpected tail events in global equity markets. This was pleasing in a year when returns to the broader active management, hedge fund and risk premia universe of strategies were challenged. Defensive strategies were also challenged by the sharp rise in risk asset returns during 2019.

The active management industry, including hedge funds, is evolving. We have low conviction that broad industry returns will improve, so our strategy concentrates on investing with the handful of truly exceptional managers available to institutional investors. This manager set will evolve and we see signs that returns to managers who are experts in using non-traditional techniques are increasingly consistent and differentiating. We have focused our investment and research activity accordingly.

Activity within the largest sub-sector, macro-directional strategies, remained low. Performance was reasonably strong and the flexibility of managers in this space to navigate through changing environments for risk assets, in particular through the last quarter of 2018-19, was pleasing. We continue to run an active seeding program and to position the portfolio in a way which helps us identify and provide capital to mispriced assets following potential market dislocations. We graduated one seeded manager to a direct relationship during the period and have high conviction that this will become a key relationship over time.

The multi-strategy sub-sector is concentrated into our highest conviction managers. This sub-sector performed strongly with minimal sensitivity to the direction of risk assets. We continue to seek opportunities to grow our exposure to these well-resourced managers.

Strategy exposure at 30 June 2019

Region exposure at 30 June 2019

Debt

Strategy

The Debt opportunity set is global and includes all credit-oriented investment products and strategies including:

• corporate credit
• securitised credit
• private debt, including corporate and mortgage loans
• emerging markets debt, denominated in both ‘hard’ and local currencies
• distressed and special situations credit.

The breadth and complexity of credit sub-sectors calls for our strategy, with few exceptions, to be implemented through external managers who oversee discretionary mandates.

Debt mandates and manager skillsets may be broad and multi-sector in nature or focused on specific themes, regions or sectors. Our portfolio has multiple levers through which we can dynamically access attractive opportunities as market conditions fluctuate.

Interest rate positioning is managed at the total fund level and is thus not a key component of Debt portfolio construction. Instead, the Debt portfolio’s primary role is return generation, with a core of interest income ideally augmented by capital gains over time. We aim to deliver strong risk-adjusted returns with more downside protection than equity-orientated investments.

Report

At 30 June 2019 the Debt portfolio was valued at $14.6 billion, representing 9.0% of the Future Fund.

2018-19 was another positive year for debt markets. Credit market fundamentals remained generally robust, with low credit spreads offsetting modest leverage increases, and default levels remained low. However, concerns about future global economic growth, the path of interest rates, and trade disputes were enough for investors to retreat from risk assets, including credit, at the end of 2018. The US Federal Reserve’s pivot to easier monetary policy in early 2019 encouraged investors to take risks. Ultimately credit markets ended the fiscal year about where they began, providing a year of interest income for investors who held firm through the volatility.

As a result, debt markets generated moderate returns, and so did our portfolio, with gains across all sub-sectors.

Consistent with a view we have held for some time, we continue to believe we are in the later stages of the credit cycle. We do not expect a plethora of defaults in the near term, but as and when conditions change, lenders may not be as well protected as in previous cycles. In addition to historically high leverage levels, nearly all new issuance in broadly syndicated US and European corporate credit is ’covenant-lite’, which means that lenders have few avenues to properly monitor and arrest the decline of struggling borrowers.

At the same time, most credit sectors see pricing at or near historically tight spread levels, leaving little compensation for the added risk of such unfavourable structures. While each bond or loan is unique, we question if credit markets in general are adequately compensating investors for the risk of default levels and potentially lower recoveries on defaulted bonds or loans.

Our strategy remains one of discipline, patience and preparation. We have continued to reduce exposure, particularly to liquid corporate credit and mortgage-backed securities.

Our private debt program remains the largest debt sub-sector allocation. This program provides capital to a range of borrowers in developed markets around the world, with lending secured by collateral such as corporate assets and cash flows, property and infrastructure. We have built partnerships with several managers and plan to maintain this exposure while providing additional capital prudently as conditions warrant.

We continue to believe that emerging market sovereign and corporate bonds can provide valuable portfolio diversification benefits. However, developments in global trade and other macroeconomic conditions and the potential for volatility in capital flows continue to lead us to approach this sub-sector with some caution.

Our distressed debt, investment grade and high yield credit and mortgage-backed securities allocations are focused as much as possible toward idiosyncratic opportunities instead of general ’credit beta’. We continue to harvest gains from these sub-sectors as value is realised.

Strategy exposure at 30 June 2019

Region exposure at 30 June 2019

Infrastructure and Timberland

Strategy

The Infrastructure and Timberland strategy is designed to assist the Future Fund in meeting its investment mandate, by providing inflation protection and diversification from the broader equities market. These characteristics are also expected to provide downside protection and lower volatility during periods of market downturn. We invest across the risk return spectrum, with our core assets considered more defensive, and our opportunistic assets expected to deliver a higher level of return. This reflects our investment belief that a return premium exists for illiquidity and complexity and active asset management is required to deliver this premium.

We have a long-term partnership approach with our managers and have the flexibility to access unlisted opportunities across a combination of pooled funds, co-investments, and direct asset mandates. We also invest in listed infrastructure, which we expect to provide similar characteristics to unlisted infrastructure over the longer term.

Report

At 30 June 2019 we had $12.2 billion of capital invested in the Infrastructure and Timberland portfolio, representing 7.5% of the Future Fund.

Unlisted Australian assets comprise 44.9% of the Infrastructure and Timberland portfolio. Melbourne Airport is our largest individual exposure and continues to experience significant growth in international passenger numbers, particularly from Asia. We remain attracted to Australian infrastructure exposures, given their ability to deliver low volatility, inflation linked, Australian dollar returns, consistent with our portfolio mandate.

We increased our investment in timberland assets in Australia and New Zealand this year, focusing on high quality assets in the region. We are monitoring the local market for infrastructure opportunities, but we will remain highly selective as the market is very competitive.

Unlisted overseas assets represent 32.0% of the Infrastructure and Timberland portfolio and are primarily located in developed markets. Against a market backdrop of strong demand for global infrastructure and timberland assets and low interest rates, we have seen transaction processes being well supported. During the year we took advantage of this opportunity to further reduce our exposure to core assets, in particular our interest in Gatwick Airport. Our investment in Gatwick Airport has delivered excellent returns and demonstrates the success of our partnership approach with managers and our broader co-investment program. Notwithstanding the increasing level of capital being allocated to opportunistic infrastructure, we continue to believe that active managers can deliver an appropriate return premium and we supported capital raisings by existing managers during the year.

Our listed infrastructure strategy currently represents 23.1% of the Infrastructure and Timberland portfolio. Listed infrastructure has outperformed the broader equities market over the financial year, and in this context we continue to monitor valuation levels. The current level of our listed infrastructure exposure reflects our relative view of its attractiveness versus both global equities and unlisted infrastructure.

We are monitoring a number of themes with our managers, including technological disruption and evolving regulation, which have the potential to impact the infrastructure asset class. We are also focusing on our co-investment program with overseas managers, which allows us to influence portfolio construction as well as lowering average fees.

Sector exposure at 30 June 2019

Region exposure at 30 June 2019

Property

Strategy

We invest in direct and listed property across the globe.

Our property strategy is as follows:

• Access the underlying property via the optimum entry point.
• Use dynamic and flexible mandates which enable the portfolio to be positioned to meet the current market conditions.
• Invest with high-quality aligned managers that understand the macro environment, and are able to identify best relative value across markets and the risk spectrum.
• Our listed exposure seeks to provide a diversified, global listed property exposure. The risk and returns are expected to be in line with the broad market over the long term. The liquidity of the listed market also provides us the opportunity to express an investment strategy more quickly and at a lower cost than the direct market.

Report

At 30 June 2019 we had $10.9 billion of capital invested in property, representing 6.7% of the Future Fund.

Unlisted assets comprise 72% of the property portfolio. The unlisted property market remains strong, driven by strong fundamentals, low base rates, strengthening debt availability, and a weight of capital searching for investment opportunities. Valuations across several markets and sectors remain close to historical highs. We remain cautious over the medium term that the monetary policy cycle and geopolitical risks remain elevated.

We undertook a review of our property strategy during the year. This review focused on actively repositioning the portfolio to ensure it is well constructed for the current environment. A key focus of the strategy is to reduce exposure to late cycle investments and to identify and selectively invest in best-in-class managers and strategies that have a proven track record of performing well at this stage in the cycle.

We have taken advantage of favourable market conditions to sell assets where business plans are complete and have positioned our direct portfolio to be materially underweight compared with a traditional allocation to the sector.

We have tailored our current portfolio around four key characteristics, namely:

• Defensive investments: mandates in which returns are underpinned by reliable, stable income streams.
• Secular growth: mandates where returns are supported by favourable thematics or demographics including continued demand for global logistics facilities and an ageing population.
• Special situations: specific and one-off opportunities identified as a result of distress or pricing dislocation.
• Value-add: global value mandates, where managers are able to assess relative risk and return across markets.

Our direct portfolio construction reflects that real estate is inherently cyclical and granular, with different sectors and regions in and out of favour at any given moment. We retain a material weighting to the US that provides us with strong cash flows underpinned by relatively inexpensive debt.

As we move forward through the cycle we will be selectively adding new managers that are positioning themselves to take advantage of market corrections. Additionally, we are investigating real estate technology companies and will continue to increase our investments in secular themes such as senior housing and logistics.

Our listed property strategy currently represents 28% of the property portfolio. Consistent with our unlisted property portfolio, we have selectively sold listed assets over the year where markets have performed strongly and valuations are not as compelling. Our current strategy in listed property is to have a broad market exposure across developed markets. The level of our listed property exposure reflects our relative view of its attractiveness verses global equities and unlisted property.

Sector exposure at 30 June 2019

Region exposure at 30 June 2019

Private Equity

Strategy

Our private equity strategy reflects our view that the asset class fulfils two functions within the Future Fund’s investment portfolio.

The first is to invest in high ‘alpha’ opportunities, where we believe we can earn a significant premium over similar but more liquid public market equity investments. Most of these investments would fall in the buyout, coinvestment or secondaries categories across developed and emerging markets.

The second function is to expose the Fund to investment themes that it cannot readily gain exposure to through other more liquid investments. This includes themes such as exposing the portfolio to innovative and disruptive companies (venture and growth), companies in financial difficulty that require capital to undertake financial restructurings and/or operational turnarounds (distressed opportunities), and funding idiosyncratic growth within small companies, particularly in sectors or geographies where alternative funding options are scarce (venture growth equity).

Report

At 30 June 2019 we had $25.7 billion of capital invested in the Private Equity portfolio, representing 15.8% of the Future Fund.

As the current economic expansion entered into its tenth year, the private equity market continued to make new deals, deliver exits and raise capital at near record levels.

The heavy competition for assets and increasing volumes of capital, across both debt and equity, into the market since 2014 has had the inevitable effect of increasing asset prices to all time highs.

Given this backdrop, our core areas of focus remain the funding of innovation, disruptive business models and small company growth across both developed and emerging markets. We continue to look for highly disciplined managers with (among other attributes) experience in generating strong returns in volatile economic environments and which provide good access to co-investment opportunities. We are focused on alternative, more innovative and less crowded means of getting capital to work in private companies.

We continue to believe that many segments of the market are not offering sufficient return for the risks we are expected to take, which is leading us to look for more idiosyncratic return opportunities.

Strategy exposure at 30 June 2019

Region exposure at 30 June 2019

Currency

As discussed on page 25 we explicitly manage the size and composition of the foreign currency exposures in the portfolio rather than allowing them to be shaped by our underlying investments.

At 30 June 2019, we held an exposure to foreign developed market currencies equivalent to 25.8% of the total Future Fund. We expect our basket of developed market currencies to diversify the portfolio against broad market risk and generate liquidity in adverse conditions.

We also held an exposure of 15.1% of the Future Fund to emerging market currencies on 30 June 2019. We expect a diversified exposure to emerging market currencies to deliver a modest excess return through some combination of gradual real effective exchange rate appreciation and/ or positive real interest rate differentials relative to the Australian dollar. Given that we expect its performance to be uncorrelated with broad market risk over the long term, we consider our basket of emerging market currencies to be an attractive risk-adjusted exposure at portfolio level.

Performance

At 30 June 2019 the Future Fund delivered a 10-year return of 10.4% per annum, exceeding its target of 6.5% per annum.

The Fund stood at $162.6 billion at 30 June 2019 with investment returns adding $102.1 billion to the seed capital from the Australian Government.

The Fund returned 11.5% in 2018-19 adding $16.8 billion in earnings.

Investment returns to 30 June 2019 are shown below, together with the target benchmark return set by the Investment Mandate.

Given the Future Fund’s Investment Mandate requires us to take acceptable but not excessive risk, when assessing our overall performance we look closely at the level of risk we took in the portfolio. Capturing risk in a single number is problematic, but the table shows the level of realised volatility in the portfolio. While not perfect, this measure of risk is the standard, and perhaps best understood, industry measure.

Alongside the level of realised volatility we also report the Sharpe ratio, a measure of calculating the risk-adjusted return.

All returns are reported net of costs.

Future Fund returns, benchmark and levels of risk

Costs

Cost management

Our use of external investment managers, together with our commitment to a broadly diversified portfolio and breadth of investment classes, means that over time our costs will generally be higher than those investors with less complex portfolios.

The commitment to genuine diversification is an important facet of our investment strategy and has been beneficial to the Fund’s overall performance delivering strong returns net of costs while reducing volatility. We are therefore more willing to pay higher fees where significant value is added over broad market exposure (such as private equity) or for exposures which are truly diversifying (such as hedge funds).

In asset classes where manager skill is less evident (such as listed equities), we have been transitioning the portfolio to a cheaper, more passive approach. However, we remain willing to support active management where we are confident that a manager can reliably add value net of fees.

Direct costs

Direct costs, previously reported as management costs and transaction and operational costs, reflect all directly incurred costs associated with the management of the Future Fund as reported in the audited financial statements.

The Fund’s direct costs over the last three years are on the following page. This includes the direct cost ratio (direct costs divided by the average net assets for the financial year).

Changes in costs over the years reflect changes in the size of the Future Fund, investment activity undertaken during the year, and the accrual and payment of performance fees.

Look-through costs

In addition to direct costs, investment management and performance fee costs incurred indirectly through investment vehicles or where the fund is part of a co-mingled group of funds are reported as ‘look-through’ costs.

The look-through costs are identified by making additional enquiries of managers of non-consolidated investment vehicles to estimate the underlying management and performance fees of these entities.

In providing this additional information, we seek to provide a full and complete indication of investment management and performance fee costs.

We note that these additional cost disclosures are based on unaudited estimates and derived using a variety of methodologies, particularly with regard to performance fees which may become payable.

We employ a range of performance fee arrangements, which incorporate the use of high-water marks and claw-back provisions, to ensure as far as possible that performance fees reflect genuine outperformance over time.

It is important to note that the majority of accrued performance fees are only paid on realisation of an investment and therefore it is possible not all accrued fees will ultimately be paid.

The additional look-through costs over the last three years are on the following page.

Summary of direct costs and direct cost ratio

Summary of look-through costs

Cost disclosures under section 81 of the Future Fund Act 2006

Under its statutory arrangements the Board also reports costs in accordance with section 81
of the Future Fund Act 2006.