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>Investment Report 2005The David Bickart BequestThe David Bickart Bequest is believed to be the largest personal bequest to the University of Melbourne in recent times.

Dr David Joseph Bickart graduated from the University of Melbourne 90 years ago. After serving in the First World War, hebecame a general practitioner in regional Victoria and Melbourne. He died in 1969 and his only son Louis died in 2004.

Dr Bickarts bequest to the University of Melbourne was inspired by his deep interest in medical research.

Dean of the Universitys Faculty of Medicine, Dentistry and Health Sciences, Professor James Angus, says the David BickartBequest will create a powerful endowment in the Universitys School of Medicine to support scholarships and training inpostgraduate research and international health initiatives.

The endowment will focus especially on the Asia-Pacific region and multidisciplinary partnerships in the Faculty to enhanceteaching and research.

The Ellis Stones Memorial FundIn 1977 the University opened an appeal to establish a permanent memorial to Ellis Stones who died on 4 April 1975.

Ellis Stones made an outstanding contribution to the development of a distinctly Australian style of landscape architecture andwas widely recognised as Australias most eminent landscape architect.

The fund was to be applied to the promotion of teaching and research in landscape architecture generally and when the sum of$500,000 was raised a chair in landscape Architecture was to be established.

In August 1980 the fund reached $500,000 whereupon Council established a chair in Landscape Architecture. There are twoawards for excellence in landscape architecture (known as the first and second Ellis Stones Memorial Awards) which are openfor competition annually to students enrolled in higher degrees by research of landscape architecture or relevant practices.

Examples of Trust Funds at Work

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Investment Management CommitteeMembership of the Committee is comprised of:

A Chairperson nominated by Finance Committee

The Senior Vice-Principal

The Vice Principal & Chief Financial Officer

A member of Council appointed by the Finance Committee

Up to four other members appointed by the Finance Committee,at least three of whom should have investment expertise and beexternal to the University.

Current Investment Committee

The Current Committee is as follows:

Mr Robert Johanson, ChairmanDirector, Grant Samuel

Professor Bob OfficerCapital Research

Mr Andrew SwanPortfolio Manager, Paradice Cooper

Mr David WhiteHawker Briton

Ms Justine HickeyLotus Capital Pty Ltd

Mr Ian MarshmanSenior Vice-Principal

University of Melbourne

Mr David PercivalVice Principal and Chief Financial Officer

University of Melbourne

Professor Rob BrownHead of Finance, Economics and Commerce

University of Melbourne

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The Investment Fund Strategy & Aims

The fund is comprised of capital reserves from a significant numberof trusts and endowments and accumulated University fundssurplus to immediate operating requirements.

The fund aims to meet the intergenerational requirements of theUniversity. This includes the ability to fund daily operations andenable trust funds to fulfil obligations as per their trust deed, whilstat the same time ensuring the funds perpetuity. This is achievedby selecting a portfolio structure that provides long term capitalgrowth, despite short-medium term fluctuations, and to providereliable income streams to fulfil current obligations.

On the 22nd of November 2002, the University outsourced itslong term investment fund to an external "Manager of Managers",Currently this manager is the Victorian Funds ManagementCorporation (VFMC).

Portfolio Highlights

*Includes growth and additional contributions from Trust Fundsand general University

Asset Allocation - Long Term Portfolio

Aust.Equities

%

Int.Equities

%

FixedInterest

%

ListedPpty

Trusts%

UnlistedPpty

Trusts%

Cash%

2000 61.37 1.97 32.13 4.53 0.00 0.00

2001 64.94 2.39 28.37 4.30 0.00 0.00

2002 51.70 15.70 18.50 9.00 0.00 5.10

2003 46.36 16.33 14.76 14.13 2.47 5.95

2004 52.20 18.70 14.10 9.24 5.66 0.10

2005 51.90 20.80 13.90 8.24 5.06 0.10

General

Trust Funds

Other

2005 Fund Ownership

Long Term Fund Performance Review

The Long Term Fund Objectives given to VFMC were:

Outperform benchmark return by 1% p.a. over a rolling

3 year period.

Achieve long term income yields of at least 4% p.a. andgrowth of at least 4% p.a.

Long Term Fund Performance Results

Asset Class Actual % Benchmark %

Aust. Equities 23.69 23.52

Int. Equities 20.65 18.11

Property - Listed 14.83 12.70

Property - Unlist 10.50 13.68

Fixed Interest 5.76 5.80

Asset Class Performance - 2005

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The Short Term Fund

During 2005 a large portion of the Short Term Fund was outsourcedto the Universitys current manager of managers, Victorian FundsManagement Corporation (VFMC). VFMC invest the Universitys

surplus cash in two cash-enhanced funds (Global and Australian).Allocations to the funds are at the Universitys discretion. A smallportion of cash is managed in-house via an 11am facility.

The funds primary aim is to meet the short term and cyclical cashrequirements of the University. Ownership of this fund is on adollar for dollar basis.

Governance and Investment Policy

The investment fund is run using a manager of managersapproach. The fund management contract is bound by specificperformance criteria and subject to tender every three years.

An Investment Management Committee exists to supervise,monitor and evaluate the investment performance of theUniversitys funds. It ensures the stated objectives of the fundare being met. The committee is comprised of both Universitystaff and Industry professionals. In addition Independent assetconsultants Watson Wyatt are engaged to provide asset allocation

advice and the committee also draws on the expertise containedwithin the Universitys faculty of Economics and Commerce.Currently it meets six times throughout the calendar year with thesecond meeting of the year designated to specifically review thefunds asset allocation strategies

Broad objectives of the fund are to:

(a) provide liquidity to meet cyclic payments to beneficiaries oftrusts and the operational expenses of the University; and

(b achieve long-term growth and stability of trust and endowmentfunds and general funds.

These objectives are to be achieved without exposureto undue risk, including those stemming from the occurrence of asingle event or the failure of any single investment.

Monitoring and Review Procedures

The Investment Management Committee provides advice on

investment guidelines, policies and strategies. They supervisethe fund manager and custodial administrator and monitor theperformance of the portfolio. The Investment ManagementCommittee reports through the Universitys Finance Committee toCouncil.

Acknowledgement of Investment Risk

The University Investment Policy sets specific objectives forvolatility levels.

As part of these objectives it is acknowledged that a negativereturn is likely in one in every four years. Such short termfluctuations form part of the consideration of appropriate fundstructure and the long term asset allocation.

Long Term Fund Structure

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

Investment and Management Costs

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

Investing in Various Asset Classes

In determining the appropriate asset classes in which to invest toachieve the funds objectives, the following criteria is considered: Access to and size of markets Ability to generate income Capital growth over the medium long term. Degree of liquidity

The funds long term nature and tax-free status may also influenceasset class decisions.

Investment activity embraces investment in physical financialsecurities and instruments.

The University is conscious of its responsibilities as a shareholderand actively asserts those responsibilities by voting at companymeetings. Investment in physical securities must comply with thecriteria set forth for each asset class. For example, The Universitydoes not wish to invest in companies involved in the production ormanufacture of tobacco or tobacco related products.

Asset weightings as specified in the investment policy:

Investment Income Recording andDistribution

Distribution is proportionate to the unit holdings in the fund.Income is distributed monthly subject to the maximum earnings

threshold of 5.5% per annum. Income earned in excess of 5.5%is reflected in the capital holdings of the fund.

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$m 2000 2001 2002 2003 2004 2005

Long Term Portfolio* 406.9 364.2 616.2 704.6 864.2 1094.7

Short Term 99.5 177.9 50.0 43.3 44.0 2.5

TOTAL 506.4 542.1 666.2 747.9 908.2 1097.2

C la ss o f Se cu ri ty A ss et Al lo ca ti on R an ge

Aust. Equities 45% to 55%

Fixed Interest 10% to 20%

Listed Ppty Trusts 0% to 5%

Un li ste d P pty Tr us ts 0 % t o 1 0%

Hedge Funds 0% to 10%

Internat. Equities 15% to 25%

Emerging markets 0% to 5%

Infrastructure 0% to 10%

As highlighted in the graph above, the University portfolio has abias towards Australian Equities. This strategy was employed tomaximise both the tax and increased yield opportunities to begained by a tax exempt entity such as the University with a longterm investment horizon.

The University is also expanding its investment horizon in aneffort to take advantage of the long term nature of the fund andto ensure the funds growth and perpetuity. This has resulted ina move to investments in less traditional asset classes such asinfrastructure and private equity (currently $22m is invested inthese classes with a further $20m committed to private equityfunds).

P er fo rmance (a ft er fees ) p .a . 2000 2001 2002 2003 2004 2005

Actual % 12.10 9.50 0.40 10.51 21.84 18.23

Benchmark % 9.90 8.30 -1.70 9.12 21.15 17.60

Aust. Equities

Int. Equities

Fixed Int.

Listed Ppty. Trusts

Unlisted Ppty. Trusts

Cash

2005 Asset Allocation

*

* Includes approximately 2% invested in unlisted Aust. Equities

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

Reported Funds Values 20002005

Upon the outsourcing of the Long Term Fund, the Universitysinvestment pool moved to a unitised fund structure. On thechangeover date, 22nd November, 2002 units were allocated to fundholders on a one unit for each dollar invested basis. As can be seenin the graph below, the growth in the unit value of the fund has beenquite impressive, with a unit price of $1.36 as at 31 December, 2005.

The portfolio has also been a great source of income for theUniversity. In 2005 the fund generated income of approximately$82m, $66m of which was distributed to unit holders (in line with adistribution cap of 6% for 2005), with the remainder added to thecapital value of the pool and reflected in unit prices.