Australia's A$141 billion ($106.7 billion) Future Fund is counting on committed relationships, rather than contractual obligations, to give its external managers the confidence they need to invest for the long term.
David George, the Melbourne-based fund's deputy chief investment officer, public markets, in a May 25 interview, called Japan's Government Pension Investment Fund's idea of hiring managers for a five-year market cycle to facilitate long-term thinking "interesting."
Contracting with a manager for the length of a market cycle could leave the manager less subject to performance-detracting behavioral biases, he said, adding there's probably more room to take that approach with long-only equity managers than with alternative managers, where alpha cycles are very specific to each firm.
The Future Fund takes a "somewhat different" approach to achieve the same goal — through open-ended, deep relationships with external managers, Mr. George said.
That approach is "built around essentially making a substantial investment of time, energy and effort to understand a manager as best we can on the way in (and) continuously investing all the way through to keep that understanding at a high level ... justified by the idea that we'll be there for a while," he said.
After all, Mr. George said, the Future Fund has a small team with a "not unlimited capacity" to keep doing that level of due diligence.
"If we've invested the right amount in knowledge, we can tolerate periods of underperformance and even probably do the right thing" and boost allocations to managers at those moments, Mr. George said.
Managers can change, and their capabilities can get sharper or less sharp over time, making it necessary for the Future Fund to retain the option of making decisions on hiring and terminating managers along the way, he noted.
On the Future Fund's general approach to fees, Mr. George said its "value for money framework" finds the fund paying low fees for passive strategies, and slightly higher fees for more capacity constrained offerings that can nonetheless be accessed systematically. But "to the extent we find really valuable pockets of significant value add ... we're willing to pay a much higher fee," he said.