VICTORIAN FUNDS MANAGEMENT CORPORATION

Legislative Council Standing Committee on Finance and Public Administration

Presentation by

Victorian Funds Management Corporation on 2007/2008 Annual Report

27 April 2009

VFMC Representatives

Mr Alan Hawkes, VFMC Board Member and Chair of the Audit and Risk Committee

Mr Justin Pascoe, Chief Investment Officer and Acting Chief Executive Officer

Mr Brett Davidson, Chief Operating Officer

Mr Malcolm Ashbolt, Head of Client Services

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VFMC Background

1. VFMC was established under state legislation (Act No. 61) in 1994.

2. Our Minister is Mr John Lenders, Treasurer of Victoria.

3. VFMC reports to the Minister through the Department of Treasury and Finance.

4. Independent Board.

5. Arms length investment mandate.

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Our Clients

VFMC Client Profile^

^ As at 30 June 20084

Superannuation/ Pension Funds

47%

Other6%

Insurer's47%

The Treasurer’s Vision for VFMC

Delivers superior investment outcomes

for our clients

Leads the development of the Melbourne funds management industry

VFMC is to be a Centre of Investment Excellence

that …

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VFMC’s Stated Goals

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Overview of Investment Process

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Client Objective

VFMC Investment Team

MARKETSPerformance Results

Liabilities

Strategic Asset Allocation (SAA)

- Eg, 60% Equity / 40% Bonds

Custodian

‘Example’

Client Objective : CPI + 5%

Investment alternatives :Cash = CPI + 2 – 2.5%Index-linked Bonds = CPI + 3%Infrastructure = CPI + 6%Equities = CPI + 7%Etc

In addition to returns, consider risks and correlations

To achieve the Client Objective we cannot only invest in Cash and Index-linked Bonds

Our Client Boards recognise this and sign off on the expected risk-return trade-off reflected by the Strategic Asset Allocation mix

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VFMC Version 1.0 (1994-2006)

Clients Boards set Investment Objectives and Strategic Asset Allocation mix using their own consultants

VFMC acted as an Implementer of that investment strategy

VFMC a Manager of ManagersAll investments outsourcedAll VFMC decisions subject to Board approval processMany manager relationships

Investment Performance Results : In line with performance benchmarks before fees over 10+ yearsIn top 25% of comparable funds

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VFMC Version 2.0 (2006 – 2008)

Clients Boards set Investment Objectives

VFMC develops Strategic Asset Allocation (SAA)Considerable broadening of asset classes used / instruments invested in

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* Department of Treasury (DTF) Clients represent approximately 95% of VFMC Funds Under Management. Client SAA’s differ widely depending on their objectives

Average SAA for DTF* Clients

Revised Client Investment Strategies

Equities60%Inflation Linked 

Assets17%

Debt & Other Absolute Return23%

Average DTF * Strategic Asset Allocation

at 30 June 2007

Equities56%

Inflation Linked Assets26%

Debt & Other Absolute Return18%

Average DTF * Strategic Asset Allocation

from 30 June 2008

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* Department of Treasury (DTF) Clients represent approximately 95% of VFMC Funds Under Management. Client SAA’s differ widely depending on their objectives

VFMC Version 2.0 (2006 – 2008)

Internal and external management

• Fewer external manager relationships

• VFMC synthesizes multiple perspectives of information flow– External Managers– Economists, Strategists, Research Analysts etc

• Investment team operates under Delegations from the VFMC Board

• Team of 30 investment professionals with a total staff of 67

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Focus on Total Portfolio

In managing portfolios to meet Client Objectives, VFMC creates diversified portfolios of investments in multiple asset classes

Our success is determined by Total Portfolio performance vs. Objective

Consistent with standard industry practice, VFMC does not comment on individual investments

Some transactions involving purchase of assets from listed entities, that were required to note the sale, have been confirmed by VFMC

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VFMC Advantages

VFMC seeks to maximize its advantages of scale and access to theworlds’ best investment views and resources.

• These combine with our long-term investment horizon to provide unique insights

In making specific investment decisions, VFMC’s investment team is driven by the following four Investment Belief Statements :

1. Only take risk where you expect to be rewarded2. Fees, taxes and transaction costs matter3. Markets mis-price assets creating opportunities to add value 4. Implementation / Execution is critical

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Delegations from VFMC Board

Crucial part of our ability to respond quickly as an investment manager in our own right

Supported by detailed internal review processes and reporting- Total Risk Allocation Committee (TRAC)

- Asset Class Heads, CIO chair

- Executive Investment Committee (EIC) - Heads of Operations, Legal, Client Servicing, Risk and

Investments (CIO), CEO Chair

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Governance Structure

Treasurer of Victoria

BOARD

Chief Executive Officer

Head of Legal & Compliance

Chief Operating

Officer

Chief Investment

Officer

Head of Client Service

Executive Investment

Committee (EIC)

Remuneration & Nominations

Committee

Operational Risk

Management Committee

Board CommitteesManagement Committees

Senior Management

Committee

Total Risk Allocation Committee (TRAC)

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Audit, Risk & Compliance Committee

Risk Framework

The VFMC and it’s Board are committed to effective compliance and risk management.

VFMC’s Risk Framework includes :- Compliance Strategy- Risk Management Process- Victorian Government Risk Management Framework

The Risk Framework is supported by appropriate internal policiesand procedures

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Operations and Systems

Critical link between our Investment Team, Settlement Operations, the Custodian, our Clients and Stakeholders. Supports :

– Reporting to Clients, Department of Treasury and Finance, VFMC Board and Management

– Investment Trade Instruction and Trade Settlement

– Risk monitoring and management

VFMC Operations and Investment Teams further supported by appropriate policies and procedures

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Portfolio Management System

Supports Internal investment functions and related operational functions. Capabilities include :

• Portfolio positions• Order Management, Trade Execution & Compliance• Trade Settlement / Custodial interface• Investment reporting

Required to support move from VFMC v1.0 to v2.0

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VFMC Financials

2007/2008 Period

Continued growth in headcount to support the internal investment program and broadening of the investment portfolio to achieve greater diversification

• As at 30 June 2007 VFMC had a total of 44 staff, including 19 Investment professionals.

• As at 30 June 2008 VFMC had a total of 67 staff, including 30 Investment professionals.

Investment in systems and data to support the internal investment management capabilities

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Financial Statements – Profit and Loss

2008$

2007$

Revenues 115,753,875 116,394,602

Expenses (113,268,176) (115,875,734)

Profit from continuing operations before income tax 2,485,699 518,868

Income tax expense (763,868) (165,182)

Profit from continuing operations after income tax

1,721,831 353,686

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Financial Statements - Balance Sheet

2008$

2007$

Assets

Current Assets 35,829,189 43,189,079Non-Current Assets

Total Assets

6,096,114

41,925,303

5,172,279

48,361,358

Liabilities

Current Liabilities 33,377,992 40,762,511Non-Current Liabilities

Total Liabilities

148,875

33,526,867

745,242

41,507,753

Net Assets 8,398,436 6,853,605

Equity

Contributed Equity 5,000,000 5,000,000Retained ProfitsTotal Equity

3,398,4368,398,436

1,853,6056,853,605

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Investment Performance

Performance – VFMC AggregatePeriods ending 30 June 2008

Intech category1 year 3 year 5 year

Growth (Gross) ‐10.08 7.16 10.66

VFMC ‐8.06 7.56 10.48

Source: Intech / NCS / VFMC

VFMC returns are the aggregate of VFMC's state clientsGrowth (>60%‐≤75% growth assets)

Median Returns (%) per annum to 30 June 2008

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ESSSuper Defined Benefit Fund

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Objective is CPI + 5% over rolling 5 year periods

ESSS (ex State Super) Long Term performance

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Objective is CPI + 5.5% over rolling 5 year periods

Parliamentary Contributory Superannuation Fund

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Objective is AWOTE + 2% over rolling 4 year periods

Transport Accident CommissionObjective is CPI + 5% over rolling 10 year periods

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Victorian Managed Insurance Authority

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Objective is CPI + 4% over rolling 5 year periods

Worksafe Victoria

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Objective is AWE + 4% over rolling 5 year periods

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1.

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