Investment Management Committee

Membership of the Committee is comprised of: A Chairperson nominated by Finance Committee The Senior Vice-Principal The Vice Principal & Chief Financial Officer A member of Council appointed by the Finance Committee Up to four other members appointed by the Finance Committee, at least three of whom should have investment expertise and be external to the University. Current Investment Committee The Current Committee is as follows: Mr Robert Johanson, Chairman Director, Grant Samuel Professor Bob Officer Capital Research Mr Andrew Swan Portfolio Manager, Paradice Cooper Mr David White Hawker Briton Ms Justine Hickey Lotus Capital Pty Ltd Mr Ian Marshman Senior Vice-Principal University of Melbourne Mr David Percival Vice Principal and Chief Financial Officer University of Melbourne Professor Rob Brown Head of Finance, Economics and Commerce University of Melbourne

Examples of Trust Funds at Work

The David Bickart Bequest The David Bickart Bequest is believed to be the largest personal bequest to the University of Melbourne in recent times. Dr David Joseph Bickart graduated from the University of Melbourne 90 years ago. After serving in the First World War, he became a general practitioner in regional Victoria and Melbourne. He died in 1969 and his only son Louis died in 2004. Dr Bickarts bequest to the University of Melbourne was inspired by his deep interest in medical research. Dean of the Universitys Faculty of Medicine, Dentistry and Health Sciences, Professor James Angus, says the David Bickart Bequest will create a powerful endowment in the Universitys School of Medicine to support scholarships and training in postgraduate research and international health initiatives. The endowment will focus especially on the Asia-Pacific region and multidisciplinary partnerships in the Faculty to enhance teaching and research.

Investment Report 2005

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The Ellis Stones Memorial Fund In 1977 the University opened an appeal to establish a permanent memorial to Ellis Stones who died on 4 April 1975. Ellis Stones made an outstanding contribution to the development of a distinctly Australian style of landscape architecture and was widely recognised as Australias most eminent landscape architect. The fund was to be applied to the promotion of teaching and research in landscape architecture generally and when the sum of $500,000 was raised a chair in landscape Architecture was to be established. In August 1980 the fund reached $500,000 whereupon Council established a chair in Landscape Architecture. There are two awards for excellence in landscape architecture (known as the first and second Ellis Stones Memorial Awards) which are open for competition annually to students enrolled in higher degrees by research of landscape architecture or relevant practices.

The Investment Fund Strategy & Aims

The fund is comprised of capital reserves from a significant number of trusts and endowments and accumulated University funds surplus to immediate operating requirements. The fund aims to meet the intergenerational requirements of the University. This includes the ability to fund daily operations and enable trust funds to fulfil obligations as per their trust deed, whilst at the same time ensuring the funds perpetuity. This is achieved by selecting a portfolio structure that provides long term capital growth, despite short-medium term fluctuations, and to provide reliable income streams to fulfil current obligations. On the 22nd of November 2002, the University outsourced its long term investment fund to an external "Manager of Managers", Currently this manager is the Victorian Funds Management Corporation (VFMC).

Asset Allocation - Long Term Portfolio

Aust. Equities % 2000 2001 2002 2003 2004 2005 61.37 64.94 51.70 46.36 52.20 51.90 Int. Equities % 1.97 2.39 15.70 16.33 18.70 20.80 Fixed Interest % 32.13 28.37 18.50 14.76 14.10 13.90 Listed Ppty Trusts % 4.53 4.30 9.00 14.13 9.24 8.24 Unlisted Ppty Trusts % 0.00 0.00 0.00 2.47 5.66 5.06 Cash % 0.00 0.00 5.10 5.95 0.10 0.10

Asset Class Performance - 2005

Asset Class Aust. Equities Int. Equities Property - Listed Property - Unlist Fixed Interest Actual % 23.69 20.65 14.83 10.50 5.76 Benchmark % 23.52 18.11 12.70 13.68 5.80

Long Term Fund Structure

The Long Term Fund is structured on a unitised basis whereby investors purchase units in the fund at market value. Entry and exit to/from the fund is undertaken at the beginning of each month

Investment and Management Costs

The Long Term Fund has investment management costs of less than 0.45% . The investment returns quoted in this report are all net of fees. Trust and Endowment funds, where the University is the trustee, incur an administration fee of 1.80% of trust income. The members of the Investment Management Committee generously donate their time and expertise in overseeing the fund.

2005 Asset Allocation

Aust. Equities* Int. Equities Fixed Int. Listed Ppty. Trusts Unlisted Ppty. Trust s Cash
* Includes approximately 2% invested in unlisted Aust. Equities

The Short Term Fund

During 2005 a large portion of the Short Term Fund was outsourced to the Universitys current manager of managers, Victorian Funds Management Corporation (VFMC). VFMC invest the Universitys surplus cash in two cash-enhanced funds (Global and Australian). Allocations to the funds are at the Universitys discretion. A small portion of cash is managed in-house via an 11am facility. The funds primary aim is to meet the short term and cyclical cash requirements of the University. Ownership of this fund is on a dollar for dollar basis.

Investing in Various Asset Classes

In determining the appropriate asset classes in which to invest to achieve the funds objectives, the following criteria is considered: Access to and size of markets Ability to generate income Capital growth over the medium long term. Degree of liquidity The funds long term nature and tax-free status may also influence asset class decisions. Investment activity embraces investment in physical financial securities and instruments. The University is conscious of its responsibilities as a shareholder and actively asserts those responsibilities by voting at company meetings. Investment in physical securities must comply with the criteria set forth for each asset class. For example, The University does not wish to invest in companies involved in the production or manufacture of tobacco or tobacco related products. Asset weightings as specified in the investment policy: Class of Security Aust. Equities Fixed Interest Listed Ppty Trusts Unlisted Ppty Trusts Hedge Funds Internat. Equities Emerging markets Infrastructure Asset Allocation Range 45% to 55% 10% to 20% 0% to 5% 0% to 10% 0% to 10% 15% to 25% 0% to 5% 0% to 10%

Portfolio Highlights Reported Funds Values 20002005

Governance and Investment Policy

The investment fund is run using a manager of managers approach. The fund management contract is bound by specific performance criteria and subject to tender every three years. An Investment Management Committee exists to supervise, monitor and evaluate the investment performance of the Universitys funds. It ensures the stated objectives of the fund are being met. The committee is comprised of both University staff and Industry professionals. In addition Independent asset consultants Watson Wyatt are engaged to provide asset allocation advice and the committee also draws on the expertise contained within the Universitys faculty of Economics and Commerce. Currently it meets six times throughout the calendar year with the second meeting of the year designated to specifically review the funds asset allocation strategies Broad objectives of the fund are to: (a) provide liquidity to meet cyclic payments to beneficiaries of trusts and the operational expenses of the University; and

$m Long Term Portfolio* Short Term TOTAL

2000 406.9 99.5 506.4

2001 364.2 177.9 542.1

2002 616.2 50.0 666.2

2003 704.6 43.3 747.9

2004 864.2 44.0 908.2

2005 1094.7 2.5 1097.2

As highlighted in the graph above, the University portfolio has a bias towards Australian Equities. This strategy was employed to maximise both the tax and increased yield opportunities to be gained by a tax exempt entity such as the University with a long term investment horizon. The University is also expanding its investment horizon in an effort to take advantage of the long term nature of the fund and to ensure the funds growth and perpetuity. This has resulted in a move to investments in less traditional asset classes such as infrastructure and private equity (currently $22m is invested in these classes with a further $20m committed to private equity funds).

*Includes growth and additional contributions from Trust Funds and general University Upon the outsourcing of the Long Term Fund, the Universitys investment pool moved to a unitised fund structure. On the changeover date, 22nd November, 2002 units were allocated to fund holders on a one unit for each dollar invested basis. As can be seen in the graph below, the growth in the unit value of the fund has been quite impressive, with a unit price of $1.36 as at 31 December, 2005. The portfolio has also been a great source of income for the University. In 2005 the fund generated income of approximately $82m, $66m of which was distributed to unit holders (in line with a distribution cap of 6% for 2005), with the remainder added to the capital value of the pool and reflected in unit prices.

2005 Fund Ownership

General Trust Funds Other

(b achieve long-term growth and stability of trust and endowment funds and general funds. These objectives are to be achieved without exposure to undue risk, including those stemming from the occurrence of a single event or the failure of any single investment.

Long Term Fund Performance Review

The Long Term Fund Objectives given to VFMC were: Outperform benchmark return by 1% p.a. over a rolling 3 year period. Achieve long term income yields of at least 4% p.a. and growth of at least 4% p.a.

Monitoring and Review Procedures

The Investment Management Committee provides advice on investment guidelines, policies and strategies. They supervise the fund manager and custodial administrator and monitor the performance of the portfolio. The Investment Management Committee reports through the Universitys Finance Committee to Council.

Investment Income Recording and Distribution

Distribution is proportionate to the unit holdings in the fund. Income is distributed monthly subject to the maximum earnings threshold of 5.5% per annum. Income earned in excess of 5.5% is reflected in the capital holdings of the fund.

Long Term Fund Performance Results

Performance (after fees) p.a. Actual % Benchmark % 2000 12.10 9.90 2001 9.50 8.30 2002 0.40 -1.70 2003 10.51 9.12 2004 2005 21.84 18.23 21.15 17.60

Acknowledgement of Investment Risk

The University Investment Policy sets specific objectives for volatility levels. As part of these objectives it is acknowledged that a negative return is likely in one in every four years. Such short term fluctuations form part of the consideration of appropriate fund structure and the long term asset allocation.

The Long Term Fund achieved strong results in 2005, generating returns of 18.23% and outperforming its benchmark by 31 basis points (after fees). Australian Equities in particular contributed to the strong results with returns in excess of 23%.

Aust. Equities