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* Future Fund posts returns of 12.8 pct for 2012
* Portfolio increased to A$82.4 bln
* Property exposure up with U.S. purchases
By Jane Wardell
SYDNEY, Feb 5 (Reuters) - Australia's state pension fund is seeking to build up its Australian infrastructure and U.S. and European property investments as it struggles to meet its mandated targets.
The Future Fund said bank deleveraging after the global financial crisis meant there were still good opportunities for property investment, particularly in the stressed European and U.S. markets.
The A$82.4 billion fund increased its exposure to property, infrastructure projects and timberland over the 12 months to Dec. 31. At the end of the year, the proportion of the fund invested in property was 6.6 percent, or A$5.4 billion, from 6 percent. Australia and the U.S. account for more than A$2 billion each of that investment.
Its infrastructure projects and timberland portfolio, predominantly investments within Australia, rose to 6.4 per cent, or $5.3 billion, from 5.7 per cent.
"We will keep on building [the infrastructure portfolio] for a while yet," David Neal, chief investment officer of the fund, told reporters on a conference call.
The fund late last year stepped up its investment in the U.S. property market with a $350 million stake in a fund investing in U.S. residential apartments and a $59 million investment in Dallas-based property company The Howard Hughes Corporation.
The fund on Tuesday reported returns of 12.8 percent last year, significantly higher than the 7.9 percent annual return achieved over the past three years and 5.3 percent over the past five years.
The fund, created in 2006 by the federal government to pay the pensions of state employees, has increased its portfolio to A$82.4 billion from A$73.1 billion a year ago, notably on gains of A$10 billion last year from world stock markets.
The fund increased its allocation to Australian and world stock markets over the past year to 34.5 percent of its total assets at the end of 2012 from 31.6 percent a year earlier, while running down cash holdings to 10.3 percent from 13.8 percent.
The fund, which is expected to start paying out in 2020, has been struggling to meet its mandated returns target in a low yield environment.
Despite a strong 2012, its current annualised returns of 5.4 percent are well below its mandate of a long-term average annual return of at least consumer price inflation (CPI) plus 4.5 percent to 5.5 percent a year.
Recent transactions in its targeted Australian infrastructure market have proved controversial.
The fund has been accused of inflating valuations for some assets in its A$2 billion takeover of airport assets owned by the Australian Infrastructure Fund (AIX).
The overall purchase price is higher than the AIX's market capitalisation of A$1.6 billion before the offer was made last August and an independent assessment of the assets that came in at A$1.8 billion.
Pension funds have accused the sovereign agency of lowballing its valuation of airports in Sydney and Europe under the deal so it could inflate the valuations for airports on Australia's east and west coasts, which have preemptive sales rights for Future Fund co-investors.
That has made it more difficult for co-investors to match the offers for those two attractive assets.
"We have simply applied our processes," Mark Burgess, the fund's managing director, told reporters. "We set the valuations that we think are appropriate for the assets. We are not disputing that some people have views." (Editing by Eric Meijer)