apr-11.pdf (2.07 MB) - Crown Ownership Monitoring Unit

Fund composition and performanceWith a long-term investment horizon, the Fund hasthe opportunity to benefit from the expected returnpremium from growth assets such as equities and moreilliquid assets such as non-listed equities, timber andinfrastructure.The Fund’s high exposure to growth assets helped delivera strong return of 25.1% over the year, driven by thecontinued rally in global equity markets. The Fund alsooutperformed its Reference Portfolio by 5.6% over theyear. While a large proportion of the value added over theyear resulted from revaluations of the Fund’s non-listedinfrastructure and timber investments, significant valuewas also added from the Fund’s external active managers.The Fund has a long-term expectation of exceeding theTreasury Bill rate by an average of 2.5% pa over time.The Fund is just behind this performance measure sinceinception, with a return of 7.8% pa compared to the longtermexpectation of 8.1% pa.The high level of exposure to growth assets adoptedwithin the Fund tends to generate short-term volatility, ascan be seen in the Fund’s returns over the last five years,ranging from a fall of 22.1% in 2008/09 to a gain of 25.1%in 2010/11.Over the past year the Guardians have implemented amore passive approach to investing in larger listed equitymarkets. They have decided to do this primarily usingderivative securities, with equivalent cash collateral.A portion of this cash is being used to invest in othermarkets with an expectation of producing a higher returnthan the risk-free rate. This strategy involves taking onadditional risk to that of a pure physical passive strategy,where individual securities are purchased in accordancewith their index weights. In particular it introducesadditional credit risk and counterparty risk. The Guardianshave controls in place to manage these risks and theexpected additional risk from the collateral investmentis typically offset at the total portfolio level by adjustingexposures to other market risks.The Guardians’ active investment strategies includeadjusting the Fund’s exposure to various markets(strategic tilting); exploiting opportunities in listed andunlisted markets (capturing active returns); and efficientimplementation of investment exposures (portfoliocompletion). The complexity of this overall strategyhas meant significant staff resources are employed tomanage and monitor the Fund. At balance date theGuardians employed 66 staff. Total employee payments,including financial performance incentives, amounted to$13.5 million in 2010/11.page | 61