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Annual Report 2011-2012

2011-2012 Annual Report 2

Insight. Foresight.

Without foresight, insight can be transient, and without insight, foresight can lack substance. That’s why at VFMC we believe that all decisions need to be based on both. Insight of all information at our disposal, the innovations and depth and breadth of thinking to gain intimate knowledge. And the foresight to predict the best outcome for the future success of our clients. We treat our clients’ money like it was our own and carefully consider and tailor all solutions to the smallest and largest of their needs.


Contents

About VFMC 5

Funds managed 5

Clients 6

Report from the Chairman 7

Report from the Acting Chief Executive Officer 8

Report of Operations 10

Risk Management Attestation 16

Governance 17

Corporation Structure 19

Board of Directors 20

VFMC Executive Investment Committee 25

Key Performance Indicators 27

Statement of Comprehensive Income for the financial year ended 30 June 2012 32

Statement of Financial Position as at 30 June 2012 33

Statement of Changes in Equity for the financial year ended 30 June 2012 34

Statement of Cash Flows for the financial year ended 30 June 2012 35

Notes to the Financial Statements for the financial year ended 30 June 2012 36

Statement by Chair and Management 64

Auditor-General’s Report 65

General Compliance Information 67

Disclosure Index 71

Corporate Directory 73


VFMC vision

Our vision is to produce superior investment outcomes for our clients and the State of Victoria.


About VFMC

VFMC was established under the Victorian Funds Management Act 1994. We are a public authority and body corporate governed by an independent Board of Directors whose members are appointed by the Governor in Council. The Chairman and Deputy Chairman are then appointed by the Treasurer. VFMC reports to the Treasurer of Victoria through the Department of Treasury and Finance. VFMC’s role is to provide investment and funds management services to Victorian public authorities in a commercially effective, efficient and competitive manner. VFMC’s mission is to: • meet or exceed individual client investment objectives (based on their liability profiles), • maximize long term returns on State assets with a risk profile in line with clients’ stated

risk tolerances, and • maximize the advantages of scale and the long term nature of the State’s balance

sheets.

Funds managed

At 30 June 2012, VFMC managed $36.0 billion on behalf of its clients, an increase of $100 million during the year.

VFMC’s assets under management rise and fall with markets. Assets under management are also impacted by client cash flows which have been negative in recent years due to payment of pensions and retirement benefits. The decline from FY 2007 to FY 2009 was primarily driven by the large negative market returns associated with the global financial crisis.

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Clients

VFMC works with its clients to build, manage and monitor their investment portfolios. Clients are Victorian public sector and related organisations established under State legislation. Insurance funds represent approximately 53% of funds managed by VFMC with superannuation funds representing approximately 41% of funds managed. VFMC also manages funds for a range of public sector and not-for-profit institutions including hospitals and universities. A total of $36.0 billion was managed by VFMC at 30 June 2012 on behalf of the following clients: • Department of Health • Department of Justice • ESSSuper Accumulation Fund • ESSSuper Defined Benefits Fund • ESSSuper State Super Defined Benefits Fund • LaTrobe University • Metropolitan Fire and Emergency Services Board • National Gallery of Victoria • Parliamentary Contributory Superannuation Fund • Royal Children’s Hospital • Royal Women’s Hospital • Swinburne University • Transport Accident Commission • University of Melbourne • Victorian Managed Insurance Authority • WorkSafe Victoria Each client is subject to a complex mix of commercial demands and community obligations which influence their liability profiles and risk tolerances. Clients consider their requirements for income (or capital) based on these factors and decide on appropriate investment objectives. Although each client is unique, their funds generally have investment objectives that have long term requirements for income and thus exposure to growth assets such as equities. The chart below shows the proportion of investments allocated to each asset class at 30 June 2012.

Asset Allocation (%) 30 June 2012


Report from the Chairman

Investment outperformance in the past year was more muted than the strong results of the previous two years. Even so, the results for the three years as a whole remain very strong. This was all the more creditable given the continuing very volatile and uncertain markets and has resulted in payments to VFMC staff that reflect this. VFMC secured a profit of $4.3m for 2011/12 after tax and plans to deliver a dividend of $2.15 million to the State representing half of these profits. Over the past three years, we have also seen continuing progress on a number of important fronts for VFMC. This includes the further development of a leading investment organisation that relies upon a coherent philosophy, comprehensive processes and good people in making investment decisions. Other achievements include improved risk and compliance processes; improved relationships with clients; and the remediation of a major legacy investment. In the past year, the KPMG report commissioned by the incoming government also helped facilitate action on several longstanding issues. This assisted VFMC in implementing important changes in our fee and remuneration model as well as improving a number of other policies and procedures. The general global economic and market environment remains challenging on many levels. In the VFMC Corporate Plan lodged with the Treasurer for the coming three year period, we have sought to ensure continued focus on sustaining investment returns for our clients combined with continuing advances in efficiency. Following the revisions to the fee and remuneration model, staff incentives for investment outperformance will be even more closely linked to the benefits these deliver to our clients. On behalf of the Board, I would like to thank the VFMC executive and staff for their sterling service over the past year. Justin Arter resigned as CEO in May 2012 to pursue a career elsewhere in the asset management industry and we wish him all the best. I also thank the Board for their service noting that Melda Donnelly (Deputy Chairman), Ian Court and Jack Diamond retired from the Board during the course of the year. John A Fraser Chairman


Report from the Acting Chief Executive Officer

This year we have delivered investment returns that meet the aggregate client benchmarks set for us. I am pleased with our performance especially given the continued volatility in investment markets. The results this year also consolidate the outperformance achieved by VFMC in the prior two years to produce solid outperformance for our clients over the three year period to 30 June 2012 (net of all fees). During this period, eight out of nine asset classes outperformed their respective benchmarks. These results have been achieved within our risk budgets. Consistent with our clients’ investment objectives and the long-term nature of their liabilities, our focus is on achieving long-term investment returns. We do understand however that short term volatility in equity markets and bond yields can place pressures on our clients’ businesses as assets decline and liabilities increase. I would like to acknowledge their understanding and support through this challenging period as we have worked closely with them to ensure they understand our market view and related investment strategy. Unfortunately the issues facing the world today do not have simple solutions and it is likely that we will continue to be navigating our way through a volatile environment for a few more years to come. As VFMC seeks to deliver investment outperformance to our clients net of fees, we commissioned an independent review of our investment management fees. It was pleasing that the review revealed our fees were below that of others providing comparable services for clients of the same size and with the same investment objectives. The net annual saving to the State through the operation of the Centralised Investment Model was calculated by the independent consultant as $60 million per annum - $20m per annum as a result of the scale created through the Centralised Investment Model, on which VFMC is based, and $40m per annum through VFMC’s own operating efficiencies. Over the past three years VFMC has been working to restructure the investment in Life Settlement policies made in 2007. We have worked closely with expert advisors in Australia and the US to ensure that the investment is structured to achieve the best long term outcome for our clients through an improved governance structure and control of the underlying assets by VFMC. Although this year saw another write down in the value of our investment we have been able to return $70m to clients in cash to their portfolios. We have continued to make enhancements to our trading and portfolio management platforms to support our internal investment management activities. We have been working with several vendors to enhance our exposure and risk analysis capabilities including the data upon which this is based. This will continue to be a key focus in the year ahead. To co-ordinate the various projects required across our business we have established a Project Management Office which helps management track progress of individual projects, proactively identify any potential bottlenecks and ensure that the priorities for the business as a whole are reflected. These projects are all aimed at generating better investment returns for our clients and the State of Victoria. The year also saw a variety of audits and the commencement of the role of KPMG as Prudential Supervisor. KPMG’s first quarterly report to the Department of Treasury and Finance noted that we are operating in a manner consistent with the Prudential Statement. We look forward to working with them in this capacity. Separately, an end-to-end internal audit of our transaction processing functions gave a ‘Strong’ rating to our internal control environment. Risk management will continue to be a key focus in the year ahead.


Regardless of the systems a business has in place it is the people who ultimately drive the outcomes achieved and I would like to thank the staff of VFMC for continuing to support all aspects of the investment process. Justin Pascoe Acting Chief Executive Officer and Chief Investment Officer


Report of Operations

The investment results that VFMC clients receive depend on two main sources of return: 1. General market movements; and

2. The investment outperformance generated by VFMC measured against accepted market

benchmarks.

VFMC clients’ longer term objectives are broadly framed in terms of absolute targets, for example the Consumer Price Index (CPI) + 5% or Average Weekly Earnings (AWE) + 4% on a rolling five year basis. Those outcomes have been achieved in the past and will most likely be achieved when general market conditions are supportive.

VFMC endeavours to contribute to achieving those objectives for clients by outperforming the relevant market benchmarks in each asset class and in aggregate. In the short term, VFMC’s success or otherwise in outperforming those benchmarks is measured on a net of fees basis. Importantly, pursuit of that outperformance is also properly constrained by the risk limits that have been agreed with our clients. Market volatility continued during 2011-12. Events in Europe, particularly Greece but also the potential for contagion into the much larger countries of Spain and Italy, added to the post- global financial crisis stresses in the global financial system. Despite this backdrop and negative returns from equities, VFMC’s absolute return was an aggregate 3.56%, net of fees, for the financial year. This highlights the benefits of the diversification added into our client’s portfolios in recent years. VFMC’s 3.56% return for the year, net of fees and franking credits, was 0.18% ahead of its blended aggregate client benchmark return of 3.38% with five out of nine asset classes outperforming their target benchmark. While pleased to have beaten the benchmark in aggregate over the year to 30 June 2012, the outperformance is considerably lower than in recent years. VFMC’s asset allocation positioning for 2012 detracted value as a result of our cautious positioning as reflected by an overweight to cash in client portfolios. The asset allocation positioning benefitted from an overweight to inflation-linked bonds, which were the best performing asset class for the year as measured by its benchmark. This overweight position was gradually reduced over the period. The net contribution from asset allocation was, however, negative. Client portfolios were also negatively impacted by the allocation decision to reduce client exposure to the Australian dollar which, despite VFMC’s view that the currency is fundamentally over-valued, remained strong throughout the year. In Australian equities our portfolios benefitted from an underweight to the Materials sector, which underperformed on the policy induced slowdown in China’s growth rate. Several stock specific events also contributed to a very strong relative result. Our International equity portfolios benefitted from a quality bias and structural use of cash-backed derivatives. Small Cap stocks underperformed their Large Cap peers over the financial year and our investments in that sector lagged the benchmark. Emerging markets underperformed Developed markets – our overweight position in Emerging markets therefore detracted some value but the selections in that area outperformed the relevant Emerging markets benchmark. Private Equity investments have continued to benefit from realisations and positive developments at investee companies as the program matures. We acquired some discounted secondary interests in Private Equity funds offered for sale by other institutions during the year.


Our Infrastructure investment program has performed well and reflects strong management of those assets directly held by the VFMC team plus maturation of the infrastructure fund investments made in prior years. Our infrastructure allocation increased over the year as we committed additional capital to several funds. The Property portfolio had a challenging year, the strong contribution from non-Core investments that was seen last year was not repeated. Several Core funds in our portfolio incurred transaction costs from acquisitions that have a negative short-term impact on performance. We have continued to actively manage our Cash exposures to ensure that we obtain every single basis point of performance we can for our clients whilst ensuring that we have sufficient liquidity on hand to meet their cash flow requirements. High deposit rates have been a benefit for this part of the portfolio, where we maintained an above benchmark exposure over the year. However, similar pressures have contributed to wider credit spreads in fixed interest markets generally. This has resulted in slight underperformance in our Diversified Fixed Interest allocation and material relative underperformance in Inflation-Linked bonds where, despite producing strong absolute returns, our non-government holdings have, like many other investors in this sector, lagged the benchmark considerably due to the widening of spreads. Although our Non-Traditional Strategies portfolio underperformed its benchmark, most investments in the sector performed well with our Hedge Fund and Opportunistic portfolios, a part of the portfolio which has received increased emphasis in recent years, delivering double-digit returns over the period. The Life Settlements investment held for clients in this part of the portfolio again underperformed due to a further write-down in the net present value of policies but we were able to return some cash from the investment in this period which was reinvested in other parts of client portfolios. VFMC results by asset class for one, three and five year periods are set out below on a gross (pre fees) basis alongside their relevant benchmark (Bmk) returns. Total portfolio results achieved by VFMC are shown on both a gross and net of fees and franking credits basis.

Note: * The performance of VFMC’s investments is calculated and aggregated by an independent administrator of client

portfolios.

** The benchmarks chosen for each asset class reflect industry standards. The total fund benchmark comprises asset

weighted asset class benchmarks. Benchmarks for each asset class are listed on the next page:


Asset Class Benchmark Australian Equities S&P / ASX300 Accumulation International Equities MSCI AC World IMI Net AUD (50% hedged) Private Equity S&P / ASX300 Accumulation Infrastructure CPI + 5% Property Mercer / IPD Australian PPFI Inflation Linked Bonds UBS Government Inflation Linked 0+ Yr Diversified Fixed Interest UBSA Composite Bond Non Traditional Strategies UBSA Bank Bill +2% pa Cash UBSA Bank Bill

VFMC uses a combination of internal and external management across asset classes to deliver the desired long-term investment outcomes for clients net of fees and costs. Internal management is used for sub-portfolios within the Australian Equities, Inflation Linked Bonds, Infrastructure and Cash asset classes plus a Strategy overlay portfolio. For the year ending 30 June 2012, 10 out of 13 internal strategies added value but on a dollar-weighted basis VFMC’s aggregate internal management program underperformed over the past year due to the impact of the large Index-linked bond portfolio. Over the three year period to 30 June 2012, VFMC’s internal programs have outperformed a blended benchmark by 0.38% pre fees.

The aggregate outperformance of Department of Treasury and Finance client portfolios over three years is 0.89% p.a. net delivering a 9.20% aggregate absolute return to clients over this period.


Remuneration arrangements In 2008 revised arrangements were established by VFMC to determine annual incentive payments. There were two schemes: 1. Short Term Incentive (STI) scheme that rewarded a combination of investment

outperformance against established industry benchmarks and also more qualitative factors such as efficiency, compliance and risk management.

2. Long Term Incentive (LTI) scheme that is determined solely by investment outcomes over a

rolling three year period, combining investment outperformance against established industry benchmarks and the cumulative absolute performance of VFMC clients’ portfolios over that period.

The goal of both schemes is to align staff incentives with client outcomes but this is particularly the case in the LTI scheme. All performance figures used in the determination of incentives are net of fees. For 2011/12, modest investment outperformance of 0.18% net of fees resulted in the investment component of the STI generally being a far smaller component than in the previous two years. Operationally there were numerous achievements that have benefited clients and the State that are assessed on a qualitative basis. The payments under the LTI scheme that will be made in respect of the three years to 30 June 2012 reflect the strong investment outperformance in the earlier two years as well as the more modest performance of 2011/12. This is the second three year period that has been completed under the new arrangements. The total of incentives paid under both the STI and LTI schemes in 2011/12 are $3.18m and $4.24m, respectively. For the prior period, the amounts were $4.28m and $0.25m respectively, reflecting the stronger short-term performance in 2010/11 and the poor three year return outcome delivered to clients for the period ending 30 June 2011. These incentive amounts should be seen against the cumulative increase in the value of VFMC clients’ portfolios of 30% for the three years to 30 June 2012 and outperformance of industry benchmarks over that period that added in excess of $900m to client portfolios compared with a passively managed portfolio invested in those benchmarks. VFMC staff remuneration levels have been benchmarked against similar roles in the investment industry.


Other projects

An important exercise was undertaken during the year to benchmark the fees charged by VFMC with those of investment management firms in the industry. An independent consultant was engaged to assess what fees were being charged for funds of similar size and investment objectives and risk tolerances of our clients. This analysis revealed VFMC’s fees were lower than benchmark and in aggregate were saving the State $60 million per annum compared to estimates under a structure that did not involve centralising investment functions via VFMC. This annual net saving is after payment of all VFMC salaries and performance incentives. During 2012, work continued on improving our systems and processes particularly in the areas of trading, risk and portfolio management. We also established the Project Management Office that coordinates, manages and delivers projects from across all parts of the VFMC business. All of these improvements and projects have the same ultimate objective, which is to deliver better returns and service to VFMC clients and the State of Victoria. Client relationships are at the heart of VFMC. The successful monthly series of investment forums that are open to our individual clients and other State organisations continued throughout 2011-12. These forums provided an opportunity for VFMC to communicate our market views and related investment strategies which we believe is even more important in volatile uncertain times. The quarterly Chart Pack that is prepared by the Strategy team has become a sought after reference point in bringing together what has happened in markets, what we expect will happen and what our strategic response will be based on several core scenarios. An ongoing focus at VFMC is expense and cost control. Further measures were taken during the year to reduce costs while not compromising the returns and service we provide to our clients and the State. This included a reduction in the number of staff from 86 to 83 (or 4%).


VFMC financial performance

VFMC returned a pre-tax profit of $6.2 million in 2011-12, the strongest profit result in VFMC’s history. This is well above the required rate of return on capital of the Victorian State Government Bond Yield. VFMC plans to pay a dividend of 50% of net profit after tax to its shareholder, the State of Victoria. The strong profit result is due to both higher levels of revenue and strong cost controls. Funds management revenue increased due to a higher oversight fee negotiated with clients during the period, contributing to a stronger and more stable revenue model that improves VFMC’s ability to invest in its investment platform for the long-term benefit of clients and the State. Base salary costs were flat year on year as total headcount was reduced to 83 and other costs, such as legal and tax advisory, were considerably reduced year on year. Incentive payments are a material component of VFMC’s variable costs. A performance fee arrangement with clients helps to align the interests of clients and VFMC. The past year was the first year of operation for that new fee arrangement which, inter alia, provides a much more direct link between investment performance and the funding of incentives for staff. VFMC’s balance sheet was largely unchanged. Net assets increased to $13.3 million in 2011/12 from $9.0 million in 2010/11.

Key Financials for Financial Year 2011/12 2010/11 2009/10

Pre-tax Profit $6.2m $0.25m $1.2m

MER 60bps 55bps 59.7bps

Income $119.3m $119.8m $108.8m Portfolio management and custodian expenses $80.6m $83.8m $75.6m

Salary and related expenses $21.7m $23.9m $19.0m

IT costs $3.2m $3.2m $2.6m

Legal and consulting expenses $1.5m $1.6m $3.9m

Net Assets $13.3m $9.0m $8.8m

FUM at 30 June $35.9b $35.9b $34.3b

Dividend1 $2.1m $0 $0

1 Proposed dividend for 2011/12 based on 50% Net Profit After Tax (NPAT)


Risk Management Attestation


Governance

VFMC’s governance standards have been developed to provide clear and effective division of roles and responsibilities to better facilitate accountability and operational efficiency. Through the VFMC Board Charter and Instrument of Delegation, there are delegations in place which specify responsibilities and accountabilities from government through to the management of investments. This governance framework is supported by Board committees, management committees, investment committees and risk management systems and controls. The Victorian Funds Management Corporation Act 1994 (VFMC Act) established VFMC as a body corporate governed by an independent Board of Directors whose members are appointed by the Governor in Council. The Act specifies that VFMC is subject to the general direction and control of the Treasurer and that any directions must be consistent with the objectives of the corporation as specified in the VFMC Act. These objectives are that VFMC provides investment and funds management services to Victorian public authorities in a commercially effective, efficient and competitive manner. Directions may relate to corporate performance measures but must not be in relation to an investment decision, dealing with property or the exercise of a voting right. Any direction must be published in the Government Gazette and VFMC Annual Report. The Act specifies that the VFMC Board is responsible for the management of the affairs of VFMC and may exercise its powers including the power of delegation. The Act stipulates the Board must have at least four but no more than nine members. Directors are appointed by the Governor in Council with the Chairman appointed by the Treasurer. Directors are appointed for terms not exceeding three years and are eligible to be reappointed. The VFMC Board will need members with asset management experience. Potential conflicts need to be transparent, declared and managed. The Board also requires members with complementary skills. Ultimately, the appointment of directors and assessment of experience, skills and independence is a decision for Government. The role and responsibilities of the Board are further detailed in the VFMC Board Charter. The Board’s role is to provide overall strategic guidance for VFMC and effective oversight of management. It must ensure that VFMC fulfils its objectives and functions and that its activities comply with the VFMC Act. The Board is responsible for • Appointing the CEO (with approval of the Treasurer) and the Corporation Secretary • Approving the Corporate Plan • Approving VFMC’s investment philosophy and approach as well as client investment

risk management plans designed to achieve individual client objectives • Monitoring the performance and implementation of corporate strategy by senior

management • Monitoring the investment performance of the organisation and compliance with client

investment risk management plans • The oversight of VFMC including control and accountability systems • Approving financial reports and monitoring financial results on an ongoing basis • Approving all certifications provided to the Department of Treasury and Finance and

clients


The Board has two standing committees – the Audit, Risk and Compliance Committee and the Nomination and Remuneration Committee. The Chairman evaluates the performance of the CEO, who in turn evaluates the performance of the Senior Management Committee. The performance of the Board as a whole is evaluated each year by its members. This review focuses on its effectiveness, performance of Committees and the adequacy of the Board Charter. A third party undertakes a triennial evaluation of the Board’s performance. The Board has delegated authority to the CEO and management to achieve the Corporation’s objectives and perform its functions.


Corporation structure

The diagram below shows the corporation structure and the relationships between the Treasurer, VFMC Board and VFMC management (and their key committees). It also shows the process for investment approvals.

The Board appoints the Chief Executive Officer (CEO) with the approval of the Treasurer and delegates authority to the CEO to achieve its objectives. The CEO is supported by the Senior Management Committee which meets regularly to discuss the operation of the business. The Executive Investment Committee (EIC) comprises the CEO, Chief Investment Officer (CIO), Deputy CIO, Head of Client Services, Chief Operating Officer (COO) and General Counsel. It is chaired by the CEO and meets to discuss investment matters and to ensure that operational and compliance issues have been dealt with prior to implementing investment decisions. Subsequent to the resignation of the CEO in May 2012, the CIO was appointed by the Chairman as Acting CEO. During this period the Head of Client Services has been appointed as Chair of the EIC. Total Risk Allocation Committee (TRAC) is chaired by the CIO and comprises the Deputy CIO, and Heads of Strategy, Risk, Equities, Fixed Interest, Infrastructure and Property. The Operational Risk Management Committee (ORMC) is a business committee of VFMC which assists in fulfilling its statutory and regulatory responsibilities. It is chaired by the COO and comprises the CEO, General Counsel, CIO, Risk & Compliance Manager, Head of Client Services and the Head of Investment Operations. It provides management oversight of VFMC’s operational risk and reports to and assists the VFMC Board’s Audit, Risk and Compliance Committee.


Board of Directors

Mr John Fraser Chairman Appointed June 2009 Mr Fraser has been Chairman and CEO of UBS Global Asset Management since December 2001. It is one of the four business divisions of UBS. He is also a member of the UBS Group Executive Board and Chairman of UBS Saudi Arabia. Prior to joining UBS and its predecessor organisations in 1993, Mr Fraser served for over 20 years with the Australian Treasury including appointment as Deputy Secretary (Economic) from 1990-1993 as well as postings at the International Monetary Fund (1978-80) and as Minister (Economic) at the Australian Embassy (1985-88), both in Washington DC. Mr Fraser is a member of the AccountAbility Advisory Council in New York and a Governor and Chairman of the Finance Committee for Marymount International School in London. Former board appointments include the Australian Stock Exchange (1997 to 2003), Australian Unity Funds Management (1997–2002) and the Neuroscience Institute of Australia for Schizophrenia and Dementia (2000-2002). He is also a member of the Australian Institute of Company Directors. Mr Fraser was educated at Melbourne High School and Monash University where he received a First Class Honours Degree in Economics. Mr Alan Hawkes Chairman Audit, Risk and Compliance Committee Director Appointed July 2004 Mr Hawkes has a background in strategic planning, risk management and control, and corporate governance in the private and public sectors. He has held executive positions in the Commercial Division of the Department of Treasury and Finance where his responsibilities were the implementation of government policy and governance practices of the State’s Government Business Enterprises including its financial institutions. Prior to this he had over 20 years employment in National Australia Bank group across several divisions including investment banking strategic development (in Australia and the UK), life insurance and superannuation. Mr Hawkes is also a non-executive director of the Royal Agricultural Society of Victoria (Chair Audit Committee and member Nominations Committee). Mr Hawkes holds a Bachelor of Commerce degree from University of Melbourne and has a Graduate Diploma in Corporate Management from University of NSW. He is a Fellow and graduate member of the Australian Institute of Company Directors and was formerly a Fellow and graduate member of Chartered Secretaries Australia.


Mr Grant Hehir Director Appointed October 2009 Mr Hehir has extensive experience in strategic financial management and the provision of fiscal, economic social policy advice to both the Victorian and Commonwealth governments. Mr Hehir was appointed as Secretary of the Victorian Department of Treasury and Finance (DTF) in June 2006. As Secretary, he leads the Department in providing economic, financial and resource allocation policy advice to government. Prior to this he was Secretary of the Victorian Department of Education and Training where he was responsible for advising on and delivering a range of education and training reform initiatives. Previously he was Deputy Secretary, Strategic Economic and Social Policy, in the Department of Premier and Cabinet. Mr Hehir joined the Victorian Department of Treasury and Finance in 1998 as Deputy Secretary of Budget and Financial Management Division, advising on all financial and resource management issues for the State, including Budget management and coordination. Mr Hehir commenced his career in the Commonwealth Treasury and then moved to a variety of senior roles in the Department of Administration and Finance covering Commonwealth Budget policy and strategy, the introduction of accrual budgeting, and leading the Budget Group. Mr Hehir has a Bachelor of Economics (Hons) from the University of New England and is a graduate of the Advanced Management Program, The Wharton School, University of Pennsylvania. Grant is also a member of the Australian Institute of Company Directors. Mrs Catherine Walter AM Director Appointed August 2009 Mrs Walter is a Solicitor and Company Director. She practised law for 20 years and was Managing Partner of one of the major law firms in Melbourne and thereafter a Commissioner for the City of Melbourne. Mrs Walter has chaired and participated in government think tanks in the areas of education, the arts and corporate and financial regulation. For nearly 20 years she has been a non-executive director on Boards spanning the private sector, not-for-profit and government sectors and across a range of industries: resources and energy, funds management, banking, insurance, superannuation, telecoms, education, the arts and health services. Mrs Walter is currently Chairman of Fed Square Pty Ltd, Chairman of Australian Synchrotron, a Director of Payment Systems Board, Australian Foundation Investment Company, Victorian Opera and Walter & Eliza Hall Institute of Medical Research and is a member of the MMC Australian Advisory Board. Mrs Walter holds a First Class Honours Degree in Law, a Masters Degree in Law and a Masters of Business Administration from the University of Melbourne. She is a Fellow of the Australian Institute of Company Directors.


Ms Alice Williams Director Appointed November 2011 Ms Williams has over 25 years senior management and Board level experience in the corporate and government sectors specialising in investment management, corporate advisory and equity fundraising. Ms Williams was formerly a Director of NM Rothschild and Sons (Australia) Limited, Director of Strategy and Planning for Ansett Australia Holdings Limited and a Vice President at JP Morgan Australia. Ms Williams has also held management positions with Elders Finance Group, Hong Kong Bank of Australia Limited and Citibank NA in London. Other non-executive directorships include Djerriwarrh Investments, Equity Trustees, Guild Group and Defence Health. Ms Williams is a Council Member for the Cancer Council of Victoria. Formerly, Ms Williams was Director of AirServices Australia, State Trustees Limited, Telstra Sale Company Limited, Chair STL Australia Foundation, Chair of the 2004 Wheat Marketing Review Panel, part-time Commissioner for the Victorian Competition and Efficiency Commission, Director Australian Accounting Standards Board, and Director Western Health. Mr Williams has a Bachelor of Commerce from the University of Melbourne, is a Fellow of the Australian Institute of Company Directors, and also a fellow of CPA, CFA, and ASFA AIF.

Board Composition and Membership

Under Section 13 of the Victorian Funds Management Corporation Act 1994, the Directors ‘shall be appointed by the Governor in Council, having regard to the expertise necessary for the Corporation to carry out its functions. The Treasurer shall appoint one of the Directors to be Chairman of the Corporation and one of the Directors to be Deputy Chairman’. The Board of Directors is responsible for oversight of the Corporation. This includes – but is not limited to – strategic planning, budgeting, investment process, risk management, fiduciary obligations and remuneration process.

Board Committees for Financial Year 2011-12

Audit, Risk and Compliance Committee

The Audit, Risk and Compliance Committee assists the Board in meeting its corporate and statutory obligations. The role of this Committee is to monitor the financial reporting practices and accounting policies of VFMC to monitor the effectiveness of the Corporation's internal controls, risk management and compliance strategies and to liaise with the internal and external auditors. Mr Alan Hawkes is the Chairman.

Nominations and Remuneration Committee

The Nominations and Remuneration Committee ensures the Corporation's remuneration policies and recruitment practices are consistent with the Corporation's strategic goals and human resource objectives. Mr Ian Court was the Chairman of the Nominations and Remuneration Committee prior to his retirement from the VFMC Board. The position is currently vacant and Nominations and Remuneration matters are being considered by the full Board at this time.


Directors’ Meetings

The number of Directors’ meetings held during the financial year 2011-12 and the number of meetings attended by each Director are:

Director Board of Directors Meetings

Audit, Risk & Compliance Committee Meetings

Nomination & Remuneration Committee Meetings

No. Held

No. Eligible

No. Attend

No. Held

No. Eligible

No. Attend

No. Held

No. Eligible

No. Attend

J.Fraser 7 7 7 - - - 6 6 6 I.Court 7 6 5 5 2 2 6 6 6 J.Diamond 7 6 4 5 4 4 - - - A.Hawkes 7 7 7 5 5 5 - - - G.Hehir 7 7 7 - - - 6 6 6 C.Walter 7 7 7 5 5 5 - - - A.Williams 7 4 4 5 2 2 - - - M. Donnelly 7 2 1 - - - - - -

Ms Alice Williams was reappointed to the VFMC Board and Audit, Risk & Compliance Committee in November 2011. Ms Melda Donnelly retired as Director and Deputy Chair in September 2011. Mr Ian Court and Mr Jack Diamond retired as directors in May 2012.


Directors’ Benefits

No Director of the Corporation (other than disclosed below) has, since the end of the previous financial year, received or become entitled to receive, a benefit (other than a benefit included in the total amount of emoluments received or due and receivable by Directors shown in the financial statements) by reason of a contract made by the Corporation, with the Director or with a firm of which the Director is a member, or with an entity in which the Director has a substantial financial interest. Independence and Related Parties The Directors of VFMC are appointed by the Treasurer. The Board has agreed that conflicts of interest are addressed, where applicable, by Directors declaring their interests, absenting themselves from relevant discussions and abstaining from voting at VFMC’s Board meetings. All transactions with deemed related parties have been made on normal commercial terms and conditions. The Chairman, Mr Fraser, is Chairman and CEO of UBS Global Asset Management. VFMC utilises UBS in the delivery of investment management services. Mrs Walter is a member of the Marsh McLennan Advisory Committee for Australia. VFMC utilises various services from members of the Marsh Group. Ms Williams is a Director of Equity Trustees Ltd which is the responsible entity for various managed investment schemes of funds on behalf of its clients. VFMC invests in managed investment schemes of which Equity Trustees Ltd are the responsible entity, on standard commercial terms on an arm’s length basis.

Indemnification and Insurance of Directors and Officers

The Directors’ and Officers’ liability insurance provides cover against costs and expenses involved in defending legal actions and any resulting payments arising from a liability to persons (other than the Corporation or a related body corporate) incurred in their position as Director or Officer unless the conduct involves a wilful breach of duty or an improper use of inside information or position to gain advantage. The Corporation provides each Director with a Deed of Access to Documents.

Prudential Certification by the Board

The Board certifies to the Department of Treasury and Finance and its clients annually in relation to a number of prudential obligations.


VFMC Executive Investment Committee

Mr Justin Pascoe Acting Chief Executive Officer and Chief Investment Officer Mr Pascoe joined VFMC as Chief Investment Officer in September 2008. He has 20 years of industry experience in senior roles at asset management and asset consulting firms in Australia and the Asian region, where he lived for a total of 13 years. Prior to joining VFMC, Mr Pascoe was a Managing Director at Goldman Sachs based in their Hong Kong office. Previously he was Chief Investment Officer, Asia ex Japan with responsibility for equity, fixed income and multi-asset processes for State Street Global Advisors (Asia) Ltd. Mr Pascoe has a Bachelor of Commerce degree from the University of Melbourne and received the Chartered Financial Analyst designation in 1996. Mr Pascoe was appointed Acting Chief Executive Officer upon the departure of Justin Arter from VFMC. Mr Malcolm Ashbolt Head of Client Services Mr Ashbolt joined VFMC in 2008 having previously been Head of Institutional Sales at State Street Global Advisors, Australia Limited. In this role he was responsible for developing new business opportunities and managing the firm's relationships with clients and asset consultants. Mr Ashbolt has 18 years experience in asset management and asset consulting. Prior roles include Director and Head of Institutional Sales for INVESCO Australia, responsible for all business development and client servicing in the Australian and New Zealand institutional markets, including the management of the firm's asset consulting relationships. He held other senior client focused roles in his 12 years with INVESCO. Mr Ashbolt holds a Bachelor of Economics degree from Monash University, a Graduate Diploma in Applied Finance from the Securities Institute of Australia and a Master of International Business from Melbourne University. Mr Brett Davidson Chief Operating Officer Mr Davidson was appointed to VFMC as Chief Operating Officer in September 2006. Prior to joining VFMC, Mr Davidson was Director and Chief Operating Officer, Merrill Lynch Investment Managers based in Melbourne. His career at Merrill Lynch spanned 19 years where he worked in Business Management, Chief Operating Officer and Chief Financial Officer roles in and across Investment Banking, Capital Markets, Private Banking and Funds Management Divisions. These roles encompassed Finance, Operations, Client Servicing, Technology, Legal, Compliance and Human Resources in Merrill Lynch’s global office network including London, Zurich, Singapore, Sydney and Melbourne. Mr Davidson holds a Bachelor of Economics from the University of Adelaide and is a member of the Institute of Chartered Accountants in Australia.


Mr Andrew Elliott Deputy Chief Investment Officer Mr Elliott joined VFMC in April 2007 from Deutsche Asset Management (Australia) Limited (RREEF Infrastructure) where he was a Director in infrastructure funds management. He has over 20 years experience in asset management and legal roles. He jointly led the VFMC Private Markets team covering unlisted infrastructure, property and private equity prior to becoming Deputy CIO in 2008 and continues to oversee unlisted investments as part of his current role. He has extensive experience in unlisted investments including deal origination, review, execution and ongoing portfolio management. Mr Elliott formerly sat on the boards of Epic Energy, Yallourn Energy, Australia Pacific Airports Corporation and Port of Geelong. He holds a Bachelor of Laws (Hons) and a Bachelor of Commerce from the University of Melbourne. Ms Kerrie Howard General Counsel, Corporation Secretary Ms Howard was appointed Head of Legal and Compliance of VFMC in April 2007. Prior to this she spent 14 years at BlackRock Investment Management (Australia) Limited (previously Merrill Lynch Investment Managers) where she was General Counsel and Company Secretary, responsible for risk, compliance and legal issues as well as various audit matters. Ms Howard has an extensive background in financial services, including having worked in the regulatory sector. She is a leading practitioner in the area of financial services and has held several committee positions within the funds management industry association, as well as external directorships in government related entities and the community sector. Ms Howard holds a Bachelor of Arts and LLB (Monash) and received her MBA from RMIT. Mr Justin Arter Chief Executive Officer until 18 May, 2012 Justin joined VFMC as Chief Executive Officer in November 2009 after an 18 year career with Goldman Sachs JB Were (GSJBW). His experience at GSJBW spanned the business including recognition as one of Australia’s leading equity analysts, heading the number one ranked research and strategy teams, managing the Australian equities business and management roles in strategy and proprietary trading. Justin has a Bachelor of Commerce / Laws degree from the University of Melbourne and attended the Advanced Management Program at the Wharton School in 2005. He is a director of the Baker IDI Heart and Diabetes Research Institute and a member of the Geelong Grammar School Council. Justin Arter left VFMC with effect from 18 May, 2012 to join an investment management firm in the private sector.


Key Performance Indicators

During the 2011-12 financial year, VFMC applied the key performance indicators as agreed in the 2011-12 corporate plan to assess performance.

1. Client portfolio performance versus long-term objective

VFMC manages the majority of the State’s assets available to it under the terms of the VFMC Act. At 30 June 2012, VFMC had 16 individual clients with funds under management of $35.9 billion. As noted on page 10 of this report, VFMC clients’ longer term objectives are broadly framed in terms of absolute targets, for example the Consumer Price Index (CPI) + 5% or Average Weekly Earnings (AWE) + 4% on a rolling five year basis. Those outcomes have been achieved in the past and will most likely be achieved when general market conditions are supportive. VFMC endeavours to contribute to achieving those objectives for clients by outperforming the relevant market benchmarks in each asset class and in aggregate. In the short term, VFMC’s success or otherwise in outperforming those benchmarks is measured on a net of fees basis. Importantly, pursuit of that outperformance is also properly constrained by the risk limits that have been agreed with our clients. The process starts with client objectives, which are set in terms of long term real return targets and risk tolerances defined by changes in the funding ratio. VFMC’s mandate is to implement clients’ investment portfolios to achieve these long term real return targets within accepted risk tolerances. Clients understand that their objectives will not be achieved in all periods and reflect this by setting a probability with which the objective should be met. The table below sets out the multi-year performance and stated long-term objective for each Department of Treasury and Finance client:

The above multi-period results are impacted by the extreme effects of the global financial crisis which began in 2008. Although there has been a recovery from the depths of the crisis, its effects are still being felt in financial markets and economies today.


2. Whole of State performance

VFMC performance relative to benchmark for Department of Treasury and Finance clients in aggregate has been positive over the 2011-12 financial year with a return of 3.99% (gross of fees) and 3.56% (after fees and franking credits) for aggregate Department of Treasury and Finance clients’ portfolios. This was 61 bps ahead of benchmark gross of fees and 18 bps net of fees and franking credits. The following charts show major asset class returns against the relevant benchmarks over one, three and five years ended 30 June 2012. They highlight the ongoing impact of the global financial crisis on investment returns over periods greater than three years.


Relative to our long-term client objectives (approximated by a CPI +5% target) our three year total return results of 9.20% (after fees and franking credits) are well ahead of target.

The five year returns for clients are impacted by the global financial crisis and behind desired levels but the potential for this is discussed with clients in setting their objectives and risk tolerances.


3. Client and stakeholder satisfaction

VFMC places great importance on communication with clients and stakeholders and strives for constant improvement. The very popular client investment forums that were introduced in 2009-10 continued throughout 2011-12. As in prior years, a client research trip was undertaken to review global practices in asset-liability modelling and internal management, meeting with other funds and consultants. Meetings with economists, strategists and fund managers were also useful in validating VFMC’s views of the global environment. Clients and Department of Treasury and Finance all received their monthly and quarterly reports within the agreed timetables.

4. Expense ratio

VFMC’s Management Expense Ratio (MER) at 30 June 2012 is 60bps. This ratio includes all of the investment management, administration and auditing costs associated with managing the overall investment portfolio and compares to 55bps in the prior period. The increase is due to a combination of changes in VFMC’s fee model agreed with clients during the year and performance fees paid to managers for strong results achieved. It is expressed as a percentage of the portfolio’s net asset value and thus will fluctuate with movements in equity and other markets. Centralising client investments via VFMC delivers the State and our clients a material aggregation fee benefit. This was confirmed via a benchmarking exercise undertaken by an independent global consultant.

5. Staff satisfaction

VFMC has continued to respond to staff feedback from the survey conducted in late 2010. During the year a Sustainability Committee was formed with a keen interest in promoting better resource use and improving the health and wellbeing of staff. The highlight was Health and Wellbeing Week which included Ride to Work Day, dietary advice and health checks.

6. Financial performance

VFMC’s pre-tax profit for the year to 30 June 2012 was $6.2m. This is above the target rate of return which is the 10 year Victorian State Government Bond Yield.

Annual Financial Report For the year ended 30 June 2012

ABN 27691254157


Statement of Comprehensive Income for the financial year ended 30 June 2012

Notes 2012

$’000 2011

$’000

Revenues Management fee revenue 2 118,496 119,096 Other revenue 2 807 661

119,303 119,757

Expenses Portfolio management and custodian expenses 3 80,648 83,835 Employee benefit expenses 3 21,765 24,424 Depreciation and amortisation expenses 3 920 1,696 Other expenses 3 9,796 9,550 113,129 119,505 Profit from continuing operations before income tax 6,174 252 Income tax expense 4 1,858 85 Total comprehensive income for the period 4,316 167

The Statement of Comprehensive Income should be read in conjunction with the accompanying notes included on pages 36 to 63.


Statement of Financial Position as at 30 June 2012

Notes 2012 $’000

2011 $’000

Current Assets Cash and cash equivalents 15(a) 17,213 11,014 Trade and other debtors 5 29,835 28,080 Prepayments and other receivables 916 1,009 Investments 6, 20(g) 63 62

Total Current Assets 48,027 40,165

Non-Current Assets Trade and other debtors 5 462 - Property, plant and equipment 7 1,080 1,487 Intangible assets 8 484 633 Deferred tax assets 4 4,136 3,535

Total Non-Current Assets 6,162 5,655

Total Assets 54,189 45,820 Current Liabilities Trade and other payables 9 27,629 26,496 Income tax payable 4 1,431 445 Provisions 10 9,105 5,926

Total Current Liabilities 38,165 32,867

Non-Current Liabilities Provisions 10 2,691 3,936

Total Non-Current Liabilities 2,691 3,936

Total Liabilities 40,856 36,803 Net Assets 13,333 9,017 Equity Contributed Equity 5,000 5,000 Retained Profits 8,333 4,017 Total Equity 13,333 9,017 The Statement of Financial Position should be read in conjunction with the accompanying notes included on pages 36 to 63.


Statement of Changes in Equity for the financial year ended 30 June 2012

$’000 $’000 $’000

Contributed Equity

Retained Earnings Total

1 July 2010 5,000 3,850 8,850 Profit for the period - 167 167 Other comprehensive income - - - Total comprehensive income for the period - 167 167 30 June 2011 5,000 4,017 9,017

Contributed Equity

Retained Earnings Total

1 July 2011 5,000 4,017 9,017 Profit for the period - 4,316 4,316 Other comprehensive income - - - Total comprehensive income for the period - 4,316 4,316 30 June 2012 5,000 8,333 13,333 The Statement of Changes in Equity should be read in conjunction with the accompanying notes included on pages 36 to 63.


Statement of Cash Flows for the financial year ended 30 June 2012

Notes 2012 $’000

2011 $’000

Cash flows from operating activities Receipts from trade debtors, fees and other debtors 138,357 143,720 Payments to creditors and employees (124,705) (137,280) GST paid (6,416) (8,212) Income tax paid (1,473) (1,422) Interest received 676 642 Other income 131 19 Net cash flows from / (used in) operating activities 15(b) 6,570 (2,533) Cash flows from investing activities Payments for property, plant and equipment (175) (311) Payments for intangibles (196) (221) Net cash flows used in investing activities (371) (532) Net increase / (decrease) in cash and cash equivalents 6,199 (3,065) Cash and cash equivalents at the beginning of the financial period 11,014 14,079 Cash and cash equivalents at end of financial year 15(a) 17,213 11,014 The above Statement of Cash Flows should be read in conjunction with the accompanying notes included on pages 36 to 63.


Notes to the Financial Statements – 30 June 2012

1. Statement of Significant Accounting Policies (a) Corporate information

The financial report of Victorian Funds Management Corporation (VFMC) for the year ended 30 June 2012 was authorised for issue in accordance with a resolution of the directors on 28 August 2012. VFMC was established under the Victorian Funds Management Corporation Act 1994 (“the Act”), proclaimed on 19 July 1994, and commenced operations on 20 July 1994 following a contribution of initial capital of $5,000,000. The Act established VFMC as a body corporate governed by an independent Board of Directors whose members are appointed by the Governor in Council. The Act specifies that VFMC is subject to the general direction and control of the Treasurer and that any directions must be consistent with the objectives of the corporation as specified in the Act. These objectives are that VFMC provides investment and funds management services to Victorian public authorities in a commercially effective, efficient and competitive manner.

(b) Basis of preparation The general purpose Financial Statements of VFMC have been drawn up in accordance with the provisions of the Financial Management Act 1994 (FMA), applicable Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board (‘AASB’) and Accounting Interpretations. The Financial Statements have been prepared on the basis of historical cost and except where stated do not take into account current valuations of non-current assets and investments. The financial report is presented in Australian dollars and all values are to the nearest thousand.

(c) Statement of compliance The financial report complies with Australian Accounting Standards as issued by AASB and International Financial Reporting Standards (‘IFRS’) as issued by International Accounting Standard Board (‘IASB’).


Notes to the Financial Statements – 30 June 2012

Continued (c) Statement of compliance (continued)

Summarised below are Australian Accounting Standards that have recently been issued or amended but are not yet effective and have not been adopted for the annual reporting period ending 30 June 2012:

Reference Title Summary Application date of standard

Impact on Entity financial report

Application date for Entity

AASB 9 Financial Instruments

AASB 9 includes requirements for the classification and measurement of financial assets resulting from the first part of Phase 1 of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement (AASB 139 Financial Instruments: Recognition and Measurement). These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139.

1 January 2013

Unless VFMC’s exposure to financial instruments changes, these amendments are not expected to have a material impact on VFMC’s financial report.

1 July 2013


Notes to the Financial Statements


Application date is for the annual reporting periods beginning on or after the date shown in the table below.




AASB 119 Employee Benefits

The main change introduced by this standard is to revise the accounting for defined benefit plans. The amendment removes the options for the accounting for the liability, and requires that the liabilities arising from such plans is recognized in other comprehensive income. It also revised the method of calculating the return on plan assets.

1 January 2013

The main change is in relation to defined benefit plans, and as VFMC does not have staff that are members of a defined benefit plan, and therefore will be not applicable.

1 July 2013

AASB 1053 Application of Tiers of Australian Accounting Standards

This Standard establishes a differential financial reporting framework consisting of two tiers of reporting requirements for preparing general purpose financial statements: (a) Tier 1: Australian Accounting Standards (b) Tier 2: Australian Accounting Standards – Reduced Disclosure Requirements Tier 2 comprises the recognition, measurement and presentation requirements of Tier 1 and substantially reduced disclosures corresponding to those requirements.

1 July 2013 These amendments are only expected to affect the presentation of VFMC’s financial report and will not have a direct impact on the measurement and recognition of amounts disclosed in the financial report.

1 July 2013








AASB 10 Consolidated Financial Statements

AASB 10 establishes a new control model that applies to all entities. It replaces parts of AASB 127 Consolidated and Separate Financial Statements dealing with the accounting for consolidated financial statements and UIG-112 Consolidation – Special Purpose Entities. The new control model broadens the situation when an entity is considered to be controlled by another entity and includes new guidance for applying the model to specific situations, including when acting as a manager may give control, the impact of potential voting rights and when holding less than a majority voting may give control.

1 January 2013

Unless VFMC has control over another entity/entities, the amendments are not expected to have any impact on VFMC’s financial report.

1 July 2013

AASB 11 Joint Arrangements

AASB 11 replaces AASB 131 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities – Non-monetary Contributions by Ventures. AASB 11 uses the principle of control in IFRS 10 to define joint control, and therefore the determination of whether joint control exists may change.

1 January 2013

Unless VFMC enters joint arrangements with other entity / entities, the amendments are not expected to have any impact on VFMC’s financial report

1 July 2013

AASB 12 Disclosure of Interests in Other Entities

AASB 12 includes all disclosures relating to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. New disclosures have been introduced about the judgements made by management to determine whether control exists, and to require summarised information about joint arrangements, associates and structured entities and subsidiaries with non-controlling interests.

1 January 2013

Unless VFMC has interests in other entity / entities, the amendments are not expected to have any impact on VFMC’s financial report

1 July 2013








AASB 13 Fair Value Measurement

AASB 13 establishes a single source of guidance for determining the fair value of assets and liabilities. AASB 13 does not change when an entity is required to use fair value, but rather, provides guidance on how to determine fair value under IFRS when fair value is required or permitted by IFRS. Application of this definition may result in different fair values being determined for the relevant assets.

1 January 2013

These amendments are only expected to affect the presentation of VFMC’s financial report and will not have a direct impact on the measurement and recognition of amounts disclosed in the financial report.

1 July 2013

(d) Cash and cash equivalents

For the purposes of the Statement of Financial Position and Statement of Cash Flows, cash and cash equivalents include cash on hand, deposits held at call with banks and highly liquid investments in money market instruments, having a term to maturity, from the date of purchase, of 90 days or less.

(e) Foreign currency Both the functional and presentational currency of VFMC is Australian dollars. Transactions denominated in a foreign currency are converted at the exchange rate at the date of the transaction. Foreign currency payables at balance date are translated at exchange rates at balance date. Exchange gains and losses are brought to account in determining the profit or loss for the year. VFMC does not hedge its exposure to foreign exchange gains and losses.



Continued (f) Taxation

VFMC is exempt from Federal Income Tax under Section 24AM of the Income Tax Assessment Acts 1936 and 1997 (as amended). VFMC is however required under the State Owned Enterprises Act 1992, to pay Income Tax as determined under the National Tax Equivalent Regime.

Income Taxes

Deferred income tax is provided on all temporary differences at the balance date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary difference and the carry-forward of unused tax credits and unused tax losses can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.

Revenue, expenses and assets are recognised net of the amount of GST except: Goods and Services Tax (GST)

• Where the GST incurred on the purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

• Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Statement of Financial Position. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows.



Continued

(g) Property, plant and equipment All property, plant and equipment are measured initially at cost and less accumulated depreciation and adjusted for impairment. The carrying amount equates to fair value. Plant and equipment are depreciated over their estimated useful lives using the straight-line method. The expected useful lives of these assets are in the range of 1-5 years. The cost of improvements to leasehold properties is depreciated over the period of the lease. Leasehold improvements held at the reporting date are being depreciated over 5-10 years. The assets’ residual values, useful lives and depreciation methods are reviewed and adjusted, if appropriate, at each financial year-end. The carrying values for property, plant and equipment are reviewed for impairment at each reporting date, with the recoverable amount being estimated when events or circumstances indicate that the carrying value may be impaired. Impairment losses are recognised in the Statement of Comprehensive Income. There has been no change to the estimated useful lives of plant and equipment and improvements to leasehold properties over the financial year.

(h) Investments and other financial assets

Investments and financial assets in the scope of AASB 139 Financial Instruments: Recognition and Measurement are categorised as either financial assets at fair value through profit or loss or as receivables. For unlisted investments with no active market, fair value is initially determined as the cost of acquisition. After initial recognition, the valuation approach primarily used to determine fair value of unlisted trusts is based on the daily unit price of the trusts. VFMC conducts an annual internal review of asset values, which is used as a source of information to assess for any indicators of impairment. If any indication of impairment exists, an estimate of the asset’s recoverable amount is calculated.

(i) Intangibles Intangible assets acquired separately are initially measured at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Costs incurred subsequent to initial acquisition are capitalised when it is expected that additional future economic benefits will flow to the entity. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful life by using the straight-line method and are tested for impairment whenever there is an indication that the intangible asset may be impaired. Intangible assets held at reporting date are being amortised over three years. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for prospectively by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in profit or loss in the expense category consistent with the function of the intangible asset. There has been no change to the estimated useful lives over the financial year. Intangible assets with indefinite useful lives are tested for impairment annually as such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed each reporting period to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis.



Continued VFMC conducts an annual review for impairment and if any indication of impairment exists, an estimate of the intangible asset’s recoverable amount is calculated. At reporting date, VFMC does not have any intangible assets with indefinite useful lives.

(j) Impairment VFMC conducts an annual internal review of asset values, which is used as a source of information to assess any indicators of impairment. External factors, such as changes in expected future processes, technology and economic conditions, are also monitored to assess for indicators of impairment. If any indication of impairment exists, an estimate of the asset’s recoverable amount is calculated. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets. Non-financial assets other than goodwill that suffered an impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed.

(k) Provisions Provisions are measured as the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date. The discount rates used to determine the present value are the Reserve Bank of Australia 10 year rate for semi-annual coupon bonds at balance date.

(l) Employee benefits

Liabilities for annual leave are recognised and are measured as the amount unpaid at the reporting date at current pay rates in respect of employees’ services up to that date. Liabilities for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. A liability for long service leave is recognised, and is measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service (greater than six years are classified as current liabilities). Expected future payments are discounted using interest rates on Commonwealth Government securities with terms to maturity that match, as closely as possible, the estimated future cash outflows. The components of the current long service leave liability (unconditional) are measured at:

• nominal value – component that VFMC expects to settle within 12 months; and • present value – component that VFMC does not expect to settle within 12 months.

The nominal and present values have been calculated by using a long service leave model supplied by the Department of Treasury and Finance. Any gain or loss following revaluation of the present value of non-current long service leave liability is recognised as a transaction for which is then recognised in the Statement of Comprehensive Income. VFMC staff are entitled to short term incentives that are calculated based on the quantitative and qualitative aspects of their performance. A liability for short term incentive is measured in full and recognised at reporting date.



Continued

A liability for long term incentives is recognised, being performance against quantitative measures, and is measured at the present value of the expected future payments and the cost of the benefits is attributed to the period in which the services are rendered that give rise to the obligation. Any contributions made to the superannuation funds are charged against the Statement of Comprehensive Income when due.

(m) Dividends In accordance with the State Owned Enterprises Act 1992, VFMC is required to pay the Victorian State Government a dividend out of retained profits as determined by the Treasurer in consultation with the Board of VFMC. The distribution policy set by the Treasurer is approximately 50% of after-tax profits. As advised by the Department of Treasury and Finance, a dividend was not required in the 2011 financial year. In accordance with AASB 137 “Provisions, Contingent Liabilities and Contingent Assets”, a provision for dividends will only be recognised at the reporting date where the dividends have been determined.

(n) Leases

The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Operating lease payments are recognised as an expense in the Statement of Comprehensive Income on a straight-line basis over the lease term. Operating lease incentives are recognised as a liability when received and subsequently reduced by allocating lease payments between rental expense and reduction of the liability.

(o) Trade and other receivables Trade and other receivables are initially recognised at fair value and these represent amounts due for services supplied by VFMC prior to the end of the financial year. All receivables are non-interest bearing and settlement terms are up to 30 days from the invoice date. Services are only supplied to government related entities and no allowance is made for doubtful debts.

(p) Trade and other payables Trade and other payables are carried at amortised cost and represent liabilities for services provided to VFMC prior to the end of the financial year and which are unpaid. All payables are non-interest bearing and are paid within the settlement conditions applicable to each provider of goods and/or services.

(q) Revenue recognition

Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent it is probable that the economic benefit will flow to VFMC and the revenue can be reliably measured. Management fee revenue represents revenue received and receivable from clients in relation to the provision of investment and funds management services including custody and administration services. It is recognised monthly based on monthly funds under management (“FUM”). Interest revenue is recognised at the effective rate prevailing at the time on the amount deposited. Performance fee revenue is earned on both the long term (3 years) and short term (1 year) outperformance against benchmarks. Performance fees are accrued monthly and charged to clients at the end of the performance period.



Continued (r) Portfolio management /custodian fees

These expenses are calculated and recognised on a monthly basis in accordance with the contractual obligations in place between VFMC and its service providers.

(s) Related Party Disclosures In December 2009, AASB issued a revised AASB 124 Related Party Disclosures. It is effective from 1 January 2011. The amendment removes the requirement for government related entities to disclose details of all transactions with the government and other government related entities and clarifies and simplifies the definition of a related party. However, as VFMC is required to comply with FRD21A under the Financial Management Act, we have disclosed details of transactions for Responsible Persons in note 13.

(t) Contributed capital Contributed capital is recognised at the fair value of the consideration received by VFMC.

(u) Use of estimates VFMC makes estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Areas such as deferred income tax balances, employee liabilities and provisions, may require management to make estimates.



Continued

2012 $’000

2011 $’000

2. Revenues

Management fee revenue 118,496 119,096 Interest revenue - Cash at bank 365 396 - Short term deposit 310 246 Other 132 19 Total 119,303 119,757 3. Expenses

Portfolio management and custodian expenses 80,648 83,835 Salary and related expenses 21,413 23,951 Directors’ fees 352 473 Total employee benefit expenses 21,765 24,424 Depreciation of property, plant & equipment 575 478 Amortisation of intangible 345 1,218 Total depreciation and amortisation expenses 920 1,696 Legal and consultancy expenses 1,460 1,587 IT expenses 3,150 3,198 Market data 1,340 1,183 Rental and outgoings 879 881 Insurance 693 734 Audit fees 92 64 Other administration expenses 2,182 1,903 Total other expenses 9,796 9,550 Total 113,129 119,505



Continued

2012 $’000

2011 $’000

4. Income Tax

(a) Income tax expense The major components of income tax expense are: Statement of Comprehensive Income Current income tax charge 2,419 1,357 Deferred income tax – relating to origination and reversal of temporary differences

(561) (1,272)

Income tax expense reported in the Statement of Comprehensive Income

1,858 85

(b) The difference between income tax expense provided in the financial statements and the prima facie income tax expense is reconciled as follows:

Accounting profit before tax from continuing operations 6,174 252 Prima facie tax calculated at 30% 1,852 76 Non-deductible expenses 6 9 Income tax attributable to profit from continuing operations 1,858 85 Income tax payable 1,431 445 Deferred tax assets 4,136 3,535

Deferred tax assets at 30 June relates to the following: - salary and related expenses 3,620 2,964 - audit 162 171 - fixed assets 354 400 Total 4,136 3,535 5. Trade and Other Debtors

Current Trade debtors 3,714 2,101 Accrued management fee revenue 24,321 22,468 Australian Taxation Office (GST) - 272 Receivables from VFMC Trusts* 1,800 3,239 Total 29,835 28,080


Notes to the Financial Statements Continued

2012 $’000

2011 $’000

5. Trade and Other Debtors (Continued)

Non-Current Accrued management fee revenue 462 -

Total 462 - * Includes reimbursement from VFMC Trusts for expenses incurred on their behalf.

6. Investments

Current Investment in VFMC Trusts* 20(g) 63 62 Total 63 62

* Investments in VFMC Capital Stable Fund, VFMC Balanced Fund and VFMC Growth Fund.

7. Property, Plant and Equipment Leasehold premises improvements At Fair value 1,768 1,682 Less: Accumulated depreciation (985) (763) 783 919 Furniture, fittings and equipment At Fair value 1,494 1,486 Less: Accumulated depreciation (1,197) (918) 297 568 Total 1,080 1,487 Reconciliation Leasehold premises improvements Carrying amount at beginning 919 1,117 Additions 86 9 Depreciation expenses (222) (207) 783 919 Furniture, fittings and equipment Carrying amount at beginning 568 537 Additions 82 302 Depreciation expenses (353) (271) 297 568 Total 1,080 1,487



Notes 2012

$’000 2011

$’000

8. Intangible Assets Computer software at cost 6,033 5,855 Less: Accumulated amortisation (5,549) (5,222) Total 484 633 Reconciliation Carrying amount at beginning 633 1,630 Additions 196 216 Amortisation expenses (345) (1,213) Total 484 633 9. Trade and Other Payables

Current Accrued management fees 22,864 21,550 Australian Taxation Office (GST) Trade creditors & other payables

439 4,326

- 4,956

Total 27,629 26,496 10. Provisions

Current Annual leave 1,094 921 Long service leave 379 265 Incentives 7,632 4,740 Total* 9,105 5,926 Non-Current Long service leave 695 379 Incentives 1,996 3,557 Total* 2,691 3,936 *Inclusive of on-costs such as payroll tax and superannuation guarantee payable.



Continued

11. Commitments

Lease rental commitment VFMC has entered into commercial office, motor vehicle and office equipment leases. These leases have an average life between one and ten years. There are no restrictions placed upon the lessee by entering into these leases.

2012

$’000 2011

$’000 Commitments in relation to operating leases are payable as follows:

Not later than one year 1,078 1,111 Later than one year, but not later than five years 3,179 3,714 Later than five years - 543 Total 4,257 5,368 12. Superannuation Information

Names of Schemes Various complying superannuation funds as nominated by employees. VFMC’s default superannuation fund is Australian Super.

VFMC, on behalf of its employees, contributed the following amounts in accordance with the Superannuation Guarantee Charge Act (1992). Note there are no outstanding contributions at year end.

1,040 1,373

Total 1,040 1,373



13. Responsible Persons

In accordance with the Ministerial Directions issued by the Minister for Finance under the FMA, the following disclosures are made regarding responsible persons for the reporting period. (a)

The names of each person who held a position of responsible person at any time during the financial year and until the date of this report are as follows:

Names

The MinisterThe Honourable Kimberley (Kim) Arthur Wells MP, Treasurer.

,

The DirectorsMr J Fraser (Chairman)

,

Ms M Donnelly (Resigned: 15 November 2011) Mr I Court (Term Expired: 27 May 2012) Mr J Diamond (Term Expired: 27 May 2012) Mr C Donnelly (Term Expired: 13 July 2011) Mr A Hawkes Mr G Hehir Mrs C Walter Ms A Williams (Appointed: 15 Nov 2011)

Mr J Arter (Resigned: 18 May 2012) Chief Executive Officer,

Mr J Pascoe (Appointed: Acting CEO from 18 May 2012)

(b)

Related party transactions

Transactions during the year between VFMC, its clients and service providers have been undertaken on normal commercial terms and conditions. Conflicts of interest are overcome where applicable by directors declaring their interests and abstaining from voting at VFMC’s Board meetings, and where appropriate excusing themselves from the meeting. VFMC may enter into commercial arrangements with parties related to VFMC directors. These arrangements are conducted in the ordinary course of business and are entered into under normal commercial terms and conditions.

The Chairman, Mr J Fraser, is Chairman and CEO of UBS Global Asset Management (“UBS”). VFMC utilises UBS in the delivery of investment management services. VFMC has funds managed by UBS of $1,490,225,084 (2011: $1,374,316,767) and has paid / payable management fees of $1,469,215 (2011: $1,427,921). VFMC has utilised UBS funds management services since 1996. This predates Mr J Fraser’s involvement with VFMC. Ms A Williams is a Director of Equity Trustees Ltd, which is the Responsible Entity (“RE”) for a number of managed funds. On behalf of its clients, VFMC invests in managed investment schemes of which Equity Trustees Ltd are RE. The Investment Manager of the scheme appoints the RE, and has appointed Equity Trustees Ltd independent of VFMC. VFMC has funds invested of $90,678,081 (2011: $97,595,429) and has paid / payable management fees of $429,385 (2011: $481,626). A portion of these management fees is payable by the Investment Manager of the scheme to the RE.



Continued

13. Responsible Persons (continued)

Mrs C Walter is a member of Marsh and McLennan Companies’ (MMC) Advisory Board. VFMC utilises MMC’s insurance broking services. VFMC paid professional service fees to Marsh of $77,000 in 2012 (2011: $64,271). Mr G Hehir held appointments at Treasury Corporation of Victoria (TCV) and Department of Treasury and Finance whilst being a director of VFMC. No other directors held appointments with other government entities, to which VFMC has any form of commercial relationship whilst still being a director of VFMC. VFMC generated interest income of $45,844 (2011: $62,519) from its cash holdings with TCV. VFMC has investments in Guaranteed Bill Index Deposits (GBID) managed by TCV of $1,000,000 at 30 June 2012 (2011: $1,000,000). On behalf of its clients, VFMC invests funds with TCV periodically, with GBID of $769,415,000 held during the year (2011: $1,242,847,030). Accordingly, VFMC clients earn interest income at prevailing market rates on normal commercial terms and conditions. VFMC, as trustee of the VFMC Trusts as listed in Note 14, outsources certain management services and the custodial function to external service providers. All costs associated with the external management services and custodial services are paid for by VFMC and are either charged directly to unitholders or charged back to the VFMC Trusts on normal commercial terms and conditions. Trust receivables as at 30 June 2012 were $1,799,906, (2011: $3,238,943). Management fees are paid on a monthly basis. Total fees received by VFMC during the year for the management of the VFMC Trusts were $6,259,245 (2011: $6,313,434).



Continued

13. Responsible Persons (continued) (c)

Compensation of Responsible Persons

The number of responsible persons (includes Directors and the Chief Executive Officer and any person acting in his/her place), their base and total remuneration during the reporting period are shown in the table below. Base remuneration is exclusive of short term and long term incentives, long-service leave, redundancy, relocation and retirement benefits paid or payable.

Income Band Total Remuneration

Base Remuneration

2012 2011 2012 2011 No. No. No. No. $Nil to $9,999 2 1 2 1 $10,000 to $19,999 1 - 1 - $30,000 to $39,999 1 - 1 - $40,000 to $49,999 - 1 - 1 $50,000 to $59,999 4 6 4 6 $60,000 to $69,999 1 - 1 - $110,000 to $119,999 1 1 1 1 $180,000 to $189,999 - - - - $280,000 to $289,999 - - - - $440,000 to $449,999 - - 1 - $460,000 to $469,999 - - - 1 $550,000 to $559,999 1 - - - $800,000 to $809,999 - 1 - - Total numbers 11 10 11 10 Total amount (excluding non vested long term incentives)

$983,054 $1,272,271 $870,784 $937,378

Total of long term incentives (non vested and at risk)

- $133,790 - -

Total amount $983,054 $1,406,061 $870,784 $937,378

In accordance with Financial Reporting Direction 21A of the FMA, VFMC has included the remuneration of the outgoing CEO (to 18 May 2012) and Acting CEO (appointed 18 May 2012) with Directors as responsible persons.



Continued


(d) Compensation of Executive Officers

The number of executive officers in key management positions (excluding the Chief Executive Officer and Acting Chief Executive Officer whilst he was acting in that capacity), other than responsible persons, and their base and total remuneration during the reporting period are shown in the table below. Base remuneration is exclusive of short term and long term incentives, long-service leave, redundancy, relocation and retirement benefits paid or payable. These are included in total remuneration. Income Band

Total Remuneration

Base Remuneration

2012 2011 2012 2011 No. No. No. No. $290,000 to $299,999 - - 1 - $300,000 to $309,999 - - 1 $310,000 to $319,999 - - - 2 $320,000 to $329,999 - - 1 - $330,000 to $339,999 - - - 1 $340,000 to $349,999 - - 1 $350,000 to $359,999 - - - 1 $430,000 to $439,999 - - - - $440,000 to $449,999 - - - - $450,000 to $459,999 - - - - $460,000 to $469,999 - 2 1 - $470,000 to $479,999 - 1 - - $490,000 to $499,999 - - - - $510,000 to $519,999 1 - - 1 $520,000 to $529,999 1 - - - $530,000 to $539,999 1 - - - $690,000 to $699,999 - 1 - - $760,000 to $769,999 1 - - - $880,000 to $889,999 - 1 - - $1,230,000 to $1,239,999 1 - - - Total numbers 5 5 5 5 Total amount (excluding non vested long term incentives) $3,575,028

$2,978,533 $1,734,618

$1,841,412

Total of long term incentives (non vested and at risk) $886,927

$741,362 -

-

Total amount $4,461,955

$3,719,895 $1,734,618

$1,841,412



Continued


Long Term Incentive Plan

VFMC has in place a long term incentive (LTI) plan that aims to align staff incentive payments with investment performance measures.

Executive Officers and investment professionals are eligible to participate in the LTI. Directors are ineligible. The LTI is payable if the net of fees investment outcomes exceed benchmark over a rolling three year period. Investment out-performance is capped at two percent. A new LTI plan commences each financial year. Staff that leave the organisation within a plan’s three year period forgo their entitlement. The non current component of the LTI is at risk until it vests.

VFMC calculates a provision for each program to reflect the current estimate accruing for payment of LTI based on the achievement of relevant benchmarks. The provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date. The estimate of the expenditure is based on the probability factor, which is determined using historical performance returns. The discount rates used to determine the present value are the rates attaching to the Reserve Bank of Australia cash rate at balance date.

Depending on the vintage of the program and the timeframe for potential payment, the LTI is either recognised as a current or non-current liability. The expense is recognised in the period to which the services are provided. Movements in returns (and benchmarks) can impact on the estimate of LTI payable in any one year given the rolling nature of the provision over the three year life cycle. (e) Remuneration for Directors and Executive Officers

2012 $’000

2011 $’000

Short term employee benefits (including short term incentives) 4,450

4,208

Other long term benefits (including long term incentives at risk) 995 918 Total 5,445 5,126



Continued

14. Assets and Liabilities of VFMC Trusts for which Corporation is Trustee

VFMC’s financial statements do not include the assets and liabilities of the VFMC Trusts which are used as investment products for clients. The net assets of the Trusts are not directly available to meet any liabilities incurred by VFMC acting in its own right. VFMC will only be liable for the liabilities of the Trusts if it has committed a breach of its fiduciary duties or to the extent that the Trust has insufficient assets to settle its liabilities. Below is a list of Trusts for which VFMC acts as trustee as at 30 June 2012:

Board of Directors as trustees:

Management Involved as Directors:

VFMC Cash Trust Queensland Pipeline Pty Ltd

VFMC Australian Shares Trust VFMC Investments Pty Ltd VFM Global Small Companies Trust North Queensland Pipeline No.1 Pty Ltd VFM Emerging Markets Trust North Queensland Pipeline No.2 Pty Ltd VFMC Investment Trust I VFMC Ontario Inc. VFMC Investment Trust II VFMC Finance Trust VFMC Private Equity 1A Trust VFMC Private Equity 1B Trust VFMC UK Investment Trust VFMC Capital Stable Fund VFMC Balanced Fund VFMC Growth Fund VFMC ESSS Private Equity Trust 2004 VFMC ESSS Private Equity Trust 2006 VFMC ESSS Private Equity Trust 2007 VFMC Equity Trust 1 VFMC Insurance Strategies Trust VFMC Private Equity Program 4 (Insurance) Trust VFMC Private Equity Program 4 (Super) Trust VFMC Investment Trust IV

No insurance premiums are paid for out of the assets of the Trusts in regards to insurance cover provided to either the officers of VFMC or the auditors of the Trusts. So long as the officers of VFMC act in accordance with the Trusts’ Constitutions and the applicable Law, the officers remain indemnified out of the assets of the Trusts against losses incurred while acting on behalf of the Trusts. The auditors of the Trusts are in no way indemnified out of the assets of the Trusts. The VFMC Trusts are not subject to the financial reporting provisions of the FMA and as such are not tabled in Parliament. However, each unitholder is an entity subject to the FMA and the purpose of their investment in the Trusts and their exposure to underlying securities forms part of the annual report of each unitholder, which is tabled in Parliament by the responsible minister.



Continued

15. Notes to the Statement of Cash Flows

(a) Cash and cash equivalents

For the purpose of the Statement of Cash Flows, cash and cash equivalents include cash on hand, cash at bank and short term fixed interest investments of VFMC. These items represent cash and cash equivalents used in the day-to-day management of VFMC’s cash position. Cash and cash equivalents at the end of the financial year as shown in the Statement of Cash Flows is reconciled to the related items in the Statement of Financial Position as follows:

2012 $’000

2011 $’000

Cash at bank 6,691 5,008 Short term deposits 10,522 6,006 Total Cash and Cash Equivalents 17,213 11,014

(b) Reconciliation of profit from operating activities after income tax to net cash flows from

operating activities

Profit from continuing operations after income tax 4,316 167

Adjustments for non-cash income and expense items: Depreciation of property, plant & equipment 575 478 Amortisation of intangible 345 1,218

Changes in assets and liabilities:

(Increase) / Decrease in receivables and other debtors (2,725) 1,044 Increase / (Decrease) in payables and other provisions 4,059 (5,440) Net Cash Flows from / (used in) operating activities 6,570 (2,533)



Continued

16. Funds Under Management

Funds managed by VFMC in either a trust or a discrete capacity are not included in investments in the Statement of Financial Position, but amount to $36 billion as at 30 June 2012 (2011: $35.9bn). These funds are managed on behalf of the following clients:

• Department of Health • Department of Justice • ESSSuper Accumulation Fund • ESSSuper Defined Benefits Fund • ESSSuper State Super Defined Benefits Fund • LaTrobe University • Metropolitan Fire and Emergency Services Board • National Gallery of Victoria • Parliamentary Contributory Superannuation Fund • Royal Children’s Hospital • Royal Women’s Hospital • Swinburne University • Transport Accident Commission • University of Melbourne • Victorian Managed Insurance Authority • WorkSafe Victoria

17. Segment Information

AASB 8 Operating Segments requires an entity to disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates. AASB 8 applies to financial statements of entities whose debt and equity instruments are traded in a public market or, are in the process of issuing any class of instruments in a public market. As a result, AASB 8 is not applicable to VFMC.

18. Auditor Remuneration

2012 $’000

2011 $’000

Fees receivable by VAGO for the audit of VFMC 92 64

Total 92 64

VAGO did not provide any other services other than the audit of the financial statements.



Continued 19. Capital Management

When managing working capital, VFMC’s objective is to provide investment and fund management services to participating bodies and the state in a commercially effective, efficient and competitive manner. During 2012 VFMC did not pay dividends to the Department of Treasury and Finance (2011: $Nil). VFMC’s capital is as follows:

2012 $’000

2011 $’000

Cash, cash equivalents and short term receivables

47,048

39,094

Less trade and other payable 27,629 31,236 Working capital 19,419 7,858 Total equity 13,333 9,017 Total capital 32,752 16,875

VFMC does not have any externally imposed capital requirements.



Continued 20. Financial Risk Management Objectives and Policies

VFMC’s principal financial instruments comprise cash, short term deposits, receivables, other financial assets, investments and payables. The main risks arising from VFMC’s financial instruments are credit risk, liquidity risk and market price risk (currency risk and interest rate risk).

a) Credit risk Credit risk arises from the financial assets of VFMC, which comprise cash and cash equivalents, trade and other receivables. The exposure to credit risk arises from the potential default of a counter party on their contractual obligations resulting in financial loss to VFMC. Credit risk associated with VFMC’s receivables is minimal because significant receivables are either with other government entities or with the Trusts, which are managed by VFMC. As such no impairment provision has been recognised for these receivables. Credit risk in relation to receivables is also monitored by reviewing the ageing of receivables on a monthly basis. All receivables are non-interest bearing and standard business terms apply. In relation to VFMC’s investments, VFMC trades only with recognised creditworthy third parties. Cash balances are maintained with Westpac Banking Corporation and short term deposits are held with Treasury Corporation of Victoria – these entities have a AA or better credit rating. The carrying amount of financial assets recorded in this financial report represents VFMC’s maximum exposure to credit risk at the reporting date. Of the receivables balance only $48,894 is past due (2011: $20,691) but these balances are all less than six months past due and are not impaired.

(b) Liquidity risk Liquidity risk is the risk that VFMC will have insufficient liquidity to meet its obligations as they fall due. All payables are non-interest bearing and standard settlement terms apply. This risk is managed by regularly monitoring liquid reserves and obligations falling due and through holding of cash and only short term deposits. VFMC’s only financial liabilities are payables which are all contracted to be settled within 30 days after balance date (2011: 30 days).

(c) Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk for VFMC comprises two types of risk: market interest rates (interest rate risk) and foreign exchange rates (currency risk).



Continued 20. Financial Risk Management Objectives and Policies (continued) (d) Interest rate risk

Interest rate risk is the risk that the market value of VFMC’s investments will be adversely affected by fluctuations in interest rates. VFMC’s exposure to interest rate risk and the effective return on its financial assets and liabilities is summarised below: Interest Rate Exposure – 2012

Variable Interest Rate $’000

Non-Interest Bearing $’000

Total $’000

Cash 6,691 6,691 Short Term Deposits 10,522 10,522 Investments 63 63 Receivables: - Trade receivables 3,714 3,714 - Receivables from VFM Trusts 1,800 1,800 - Accrued management fee revenue 24,783 24,783 Payables - Accrued management fees (22,864) (22,864) - Trade creditors and other payables (4,326) (4,326) - Australian taxation office (GST) (439) (439) Net Financial Assets 17,213 2,731 19,944

Interest Rate Exposure – 2011

Variable Interest Rate

$’000

Non-Interest Bearing

$’000

Total

$’000 Cash 5,008 5,008 Short Term Deposits 6,006 6,006 Investments 62 62 Receivables: - Trade receivables 2,101 2,101 - Receivables from VFM Trusts 3,239 3,239 - Accrued management fee revenue 22,468 22,468 Payables - Accrued management fees (21,550) (21,550) - Trade creditors and other payables (4,956) (4,956) Net Financial Assets 11,014 1,364 12,378

(e) Interest rate sensitivity

A sensitivity analysis has been determined based on the exposure to interest rates at the reporting date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period.



Continued 20. Financial Risk Management Objectives and Policies (continued) (e) Interest rate sensitivity (continued)

A 50 basis point (0.5%) increase in interest rates (or discount rates) is used since this is what management believes to be the possible change in interest rates over the next 12 months following the balance date based on Australian forecast economic data (this was consistent with the prior period). These movements are attributable to VFMC’s exposure to variable interest rates on its cash holdings. At reporting date, if interest rates had been 50 basis points higher or lower during the period and all other variables were held constant, VFMC’s (pre-tax) net profit would have been impacted as follows: • 50 basis points higher: increase in profit and net assets of $59,588 (2011: $59,732 increase) • 50 basis points lower: decrease in profit and net assets of $59,588 (2011: $59,732 decrease)

(f) Currency risk

Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. VFMC operates within Australia and whilst VFMC does engage offshore fund managers to manage clients’ funds, the fees payable to these managers are in both Australian and US dollars. The AUD equivalent of fund manager fees is charged to clients. VFMC therefore bears no foreign currency risk.

(g) Fair values The carrying amounts of all financial assets and financial liabilities approximate their fair values. VFMC uses various methods in estimating the fair value of a financial instrument. The following table illustrates the level in the fair value hierarchy in which fair value measurements are categorised for financial assets. • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets

for identical assets or liabilities; • Level 2 fair value measurements are those derived from inputs other than quoted prices included within

Level 1 that are observables for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices);

• Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are based on observable market data (unobservable inputs). Fair value measurement at end of

reporting period - June 2012

Assets measured at fair value as at 30 June 2012

$’000 Level 1

$’000 Level 2

$’000 Level 3

$’000 Total

Financial assets at fair value through profit and loss - Unlisted trusts

- 63 - 63

- 63 - 63 Fair value measurement at end of reporting

period - June 2011 Assets measured at fair value as at 30 June 2011

$’000 Level 1

$’000 Level 2

$’000 Level 3

$’000 Total

Financial assets at fair value through profit and loss - Unlisted trusts

- 62

- 62

- 62 - 62 VFMC has no Level 1 and 3 fair value measures for current year and prior year.



Continued 21. Subsequent Events to Balance Date

No significant events have occurred since the end of the reporting period which would impact on the financial position of VFMC disclosed in the Statement of Financial Position as at 30 June 2012 or on the results and cash flows of the VFMC for the year ended on that date.


Statement by Chair and Management

We hereby certify that: 1. The accompanying financial statements have been prepared in accordance with Standing Direction 4.2 of

the Financial Management Act 1994, applicable financial reporting directions, Australian Accounting Standards, International Financial Reporting Standards and other mandatory professional reporting requirements;

2. The accompanying Statement of Comprehensive Income, Statement of Financial Position, Statement of

Changes in Equity, Statement of Cash Flows and accompanying notes present fairly the financial transactions for the financial year ended 30 June 2012 and the financial position as at 30 June 2012; and

3. As at the date of signing these financial statements, we are not aware of any circumstances that would

render any particulars included in the statements misleading or inaccurate.

JOHN FRASER JUSTIN PASCOE BRETT DAVIDSON Chairman Acting Chief Executive Officer Chief Operating Officer

Dated: 31 August 2012


Auditor-General’s Report


Auditor-General’s Report

Continued


General Compliance Information

This section includes disclosures required by the Financial Management Act 1994 and the Victorian Funds Management Act 1994.

Incorporation and Ministerial Responsibility

The Corporation was established under the Victorian Funds Management Corporation Act 1994 (“the Act”), proclaimed on 19 July 1994, and commenced operations on 20 July 1994 following a contribution of initial capital of $5,000,000. The Corporation is subject to the general direction and control of the Treasurer of Victoria.

Constitution, objectives, functions, powers and accountability

Constitution of the corporation

The constitution of the Corporation is specified in section 5 of the Act. 1. There is established a body by the name “Victorian Funds Management Corporation”. 2. The Corporation:

a) is a body corporate with perpetual succession;

b) has an official seal;

c) may sue and be sued;

d) may acquire, hold and dispose of real and personal property; and

e) may do and suffer all acts and things that a body corporate may by law do and suffer. 3. All courts must take judicial notice of the seal of the Corporation affixed to a document and, until the

contrary is proved, it must presume that it was duly affixed. 4. The official seal of the Corporation must be kept in such custody as the Corporation directs and must not be

used except as authorised by the Corporation.

Objectives, functions, powers and duties of the corporation

The Corporation’s objectives as stated in section 6 of the Act are to:

a) provide investment and funds management services to participating bodies and the State;

b) provide its services in a commercially effective, efficient and competitive manner.

The functions of the Corporation are contained in section 8 of the Act, part of which is reproduced below.


General Compliance Information Continued The functions of the Corporation are:

a) as principal or agent, to manage funds of a participating body or the State;

b) to provide, or to arrange for the provision of, funds management or other financial services for, and financial advice to, participating bodies and the State;

c) to act as trustee;

d) to act as manager of a trust;

e) to carry out functions or provide such financial or other services in relation to financial assets of a participating body or the State as the Treasurer determines by notice in writing given to the Corporation;

f) to carry out such other functions as are conferred on it by this or any other Act. As soon as possible after giving a notice under section (e) above, the Treasurer must cause a copy of the notice to be published in the Government Gazette. The powers of the Corporation are contained in section 9 of the Act, part of which is reproduced below: 1. For the purpose of achieving its objectives and performing its functions, the Corporation:

a) may enter into contracts for the provision of funds management and related financial services;

b) may subscribe for or otherwise acquire, deal with and hold and dispose of, units in a trust;

c) has the powers conferred on it by the Borrowing and Investment Powers Act 1987;

d) may acquire real or personal property for the use by the Corporation;

e) may sell, mortgage or grant a lease of property held by the Corporation;

f) may do all other things necessary or convenient to be done for or in connection with, or as incidental to, the achievement of its objectives or the performance of its functions.

2. Without limiting the generality of sub-section (1), but subject to the general direction of the Treasurer, the

Corporation may: a) be a member of a body corporate, association, partnership, trust or other body;

b) form, or participate in the formation of, a body corporate, association, partnership, trust or other body;

c) enter into a joint venture with another person or persons.

Freedom of information Act 1982

Under section 39 of the Act, the Corporation is not eligible to be declared an agency or prescribed authority within the meaning of the Freedom of Information Act 1982.

Victorian Industry Participation Policy

During 2011-12, there were no contracts commenced or completed to which the Victorian Industry Participation Policy Act 2003 applied.

Consultants

Total expenditure was $48,850 in respect of the year ended 30 June 2012 ($37,400 – 2011). These services were of a general nature with no one single significant relationship.


General Compliance Information Continued

Compliance with the Whistleblowers Protection Act 2001

The Whistleblowers Protection Act 2001 encourages and assists people in making disclosures of improper conduct by public officers and public bodies. The Act provides protection to people who make disclosures in accordance with the Act and establishes a system for the matters disclosed to be investigated and rectifying action to be taken. VFMC does not tolerate improper conduct by employees, nor the taking of reprisals against those who come forward to disclose such conduct. It is committed to ensuring transparency and accountability in its administrative and management practices and supports the making of disclosures that reveal corrupt conduct, conduct involving a substantial mismanagement of public resources, or conduct involving a substantial risk to public health and safety or the environment. VFMC will take all reasonable steps to protect people who make such disclosures from any detrimental action in reprisal for making the disclosure. It will also afford natural justice to the person who is the subject of the disclosure.

Disclosures under the Whistleblowers Protection Act

The current procedures established by VFMC under Part 6 are available upon request. 2011-12 2010-11 Number Number The number and types of disclosures made to public bodies during the year: Public interest disclosures 0 0 Protected disclosures 0 0 The number of disclosures referred during the year by the public body to the Ombudsman for determination as to whether they are public interest disclosures 0 0

The number and types of disclosed matters referred to the public body by the Ombudsman for investigation 0 0

The number and types of disclosures referred by the public body to the Ombudsman for investigation 0 0

The number and types of investigations taken over from the public body by the Ombudsman 0 0 The number of requests made by a whistleblower to the Ombudsman to take over an investigation by the public body 0 0

The number and types of disclosed matters that the public body has declined to investigate 0 0 The number and types of disclosed matters that were substantiated upon investigation and the action taken on completion of the investigation 0 0

Any recommendations made by the Ombudsman that relate to the public body: Recommendation regarding file security and management 0 0

VFMC encourages the reporting of known or suspected incidences of improper conduct or detrimental actions. Procedures have been established to facilitate disclosures of improper conduct by VFMC and its employees and to ensure that any matters disclosed are properly investigated and dealt with. VFMC regularly reminds staff of the legislation and procedures. During 2011-12, there were no disclosures or investigations of improper conduct or detrimental actions made to VFMC by staff or any referred by the Ombudsman or other persons.


General Compliance Information Continued

Information Available on Request

To the extent applicable, the following information has been prepared by the Corporation and is available to the relevant Minister upon request:

a) declarations of private interests duly completed by all relevant officers;

b) details of shares held by a senior officer as nominee or held beneficially in a statutory authority or subsidiary;

c) details of publications produced by the Corporation about the Corporation and the places where the publications can be obtained;

d) details of changes in prices, fees, charges, rates and levies charged by the Corporation;

e) details of any major public sector reviews carried out on the Corporation;

f) details of overseas visits undertaken including a summary of the objectives and outcomes of each visit;

g) details of major promotional, public relations and marketing activities undertaken by the Corporation to develop community awareness of the corporation and the services it provides; and

h) details of assessments and measures undertaken to improve the occupational health and safety of employees.

Staff Performance and Professional Development

Annually, each employee, in consultation with their team leader, sets his or her objectives for the coming year. These objectives must be relevant to their role and aligned with those of the Corporation. Progress is reviewed formally during the year, resulting in an overall performance evaluation which is used to determine the extent the employee will participate in the Corporation’s bonus pool. Staff are actively encouraged to maintain their professional development and are offered training courses to assist in achieving their objectives. VFMC is not bound by the provisions of the Public Sector Management and Employment Act 1998 but its human resource policies are sympathetic to the provisions of that act. VFMC is an equal opportunity employer.

Equal Employment Opportunity

The Corporation’s employment details at 30 June 2012 are as follows:

Employment Status Males Females Total Males Females

Permanent – Full time

Permanent – Part time

TOTAL

55

1

22

3

77

4

71%

25%

29%

75%

56 25 81 69% 31%


Disclosure Index The Annual Report of VFMC is prepared in accordance with all relevant Victorian legislation. This index has been prepared to facilitate identification of VFMC’s compliance with statutory disclosure requirements. Legislation Requirement Complete Report of Operations Charter & Purpose FRD 22B Manner of establishment and relevant Minister FRD 22B Objectives, functions, powers and duties FRD 22B Nature and range of services provided Management and Structure FRD 22B Organisational structure Financial and other information FRD 8B Budget portfolio outcomes FRD 10 Disclosure index FRD 12A Disclosure of major contracts N/A FRD 15B Executives officer disclosures N/A FRD 22B, SD 4.2(k) Operational and budgetary objectives and performance against

objectives

FRD 22B Employment and conduct principles FRD 22B Occupational health and safety policy FRD 22B Summary of financial results for the year FRD 22B Significant changes in financial position during the year FRD 22B Major changes or factors affecting performance FRD 22B Subsequent events FRD 22B Application and operation of Freedom of Information Act 1982 N/A FRD 22B Compliance with building and maintenance provisions Building Act

1993

N/A FRD 22B Statement of National Competition Policy N/A FRD 22B Application and operation of the Whistleblowers Protection Act 2001 FRD 22B Details of consultancies over $100,000 FRD 22B Details of consultancies under $100,000 FRD 22B Statement of availability of other information FRD 24C Reporting of office-based environmental impacts N/A FRD 25 Victorian Industry Participation Policy disclosures FRD 29 Workforce Data disclosures SD 4.5.5 Risk management compliance attestation


Disclosure Index Continued Other requirements under Standing Directions 4.2 SD 4.2(g) General information requirements SD 4.2(j) Sign-off requirements Financial Report Financial Statements required under Part 7 of the FMA SD 4.2(a) Statement of Changes in Equity SD 4.2(b) Operating Statement SD 4.2(b) Balance Sheet SD 4.2(b) Cash Flow Statement Other requirements under Standing Directions 4.2 SD 4.2(c) Compliance with Australian accounting standards and other authoritative

pronouncements

SD 4.2(c) Compliance with Ministerial Directions SD 4.2(d) Rounding of amounts SD 4.2(c) Accountable officer’s declaration SD4.2(f) Compliance with Model Financial Report Other disclosures as required by FRDs in notes to the financial statements FRD 9A Departmental disclosure of administered assets and liabilities N/A FRD 11 Disclosure of ex-gratia payments N/A FRD 13 Disclosure of parliamentary appropriations N/A FRD 21A Responsible person and executive officer disclosures FRD 102 Inventories N/A FRD 103D Non-current physical assets FRD 104 Foreign currency FRD 106 Impairment of assets FRD 107 Investment properties N/A FRD 110 Cash flow statements FRD 112C Defined benefit superannuation obligations N/A FRD 113 Investment in subsidiaries, jointly controlled entities and associates N/A FRD 114A Financial Instruments – General Government Entities and public non-financial

corporations

FRD 119 Contributions by owners N/A Legislation Victorian Funds Management Corporation Act 1994 Whistleblowers Protection Act 2001 Victorian Industry Participation Policy Act 2003 Financial Management Act 1994


Corporate Directory Principal Office Unit Registry Services Level 13 National Australia Bank Limited 101 Collins Street 500 Bourke Street Melbourne Victoria 3000 Melbourne Victoria 3000 Telephone (03) 9207 2900 Facsimile (03) 9207 2999 Internet www.vfmc.vic.gov.au External Auditor Victorian Auditor-General’s Office Level 24, 35 Collins Street Melbourne Victoria 3000 Master Custodian National Australia Bank Limited 500 Bourke Street Melbourne Victoria 3000

PO Box 18014 Collins Street East Victoria 8003 Level 13 101 Collins Street Melbourne Vic 3000 Tel: +61 3 9207 2900 Fax: +61 3 9207 2999 www.vfmc.vic.gov.au