Some advice on investment strategies for the Federal Government's new 'Future Fund'

I would not recommend attempts to actively manage asset allocation - i.e. vary the weights in the asset allocation table. The hedge fund component of the Future Fund could be larger if active asset allocation were seen as a major potential source of added value.

I would not attempt any “in house” investment. In all cases the investment process should be outsourced. Advisors such as Mercers and the Russell company would be employed to recommend the managers to be used, and for both Australian and global equities most of the relevant portfolios would be index funds. Only where there was a strong case that active managers could add value over and above their fees would such groups be used. The prestige of running the investments should lead to some very competitive bids.

It would be possible to give the government's holdings of Telstra shares to the Future Fund to sell down gradually, although until the holdings were down to index weight the fund would have an unbalanced portfolio. The offset would be lower fees for the sale of the rest of Telstra.

It goes without saying that the process by which managers were hired and fired would be subject to the highest standards of propriety and transparency. Relations with the managers and advisers would need be conducted in a similar manner. Any temptation to get inside knowledge, for example about future movements of Australian interest rates, would need to be resisted firmly.