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Category: Markets / Stockmarket / Economic Trends / Federal Government

Future Fund shifts to cash as global investment risks rise

Wednesday, 27 Jan 2016 07:55:19 | Peter Ryan

Future Fund chairman Peter Costello speaks during the Senate finance estimates hearing at Parliament House in Canberra on November 20, 2014. (AAP: Alan Porritt)

Australia's sovereign wealth fund has warned that the unwinding of economic stimulus and record low interest rates is likely to create more instability on global financial markets.

Key points

  • Future Fund grows 8.4 per cent in 2015 to $118.4 billion
  • Asset allocation includes 20.6 per cent cash, 6.5 per cent Australian shares
  • Chairman Peter Costello warns of "greater volatility" and "lower prospective returns"

The Future Fund today reported growth of 8.4 per cent for the recently ended calendar year, taking its value to $118.4 billion, but chairman Peter Costello outlined a continued cautious focus given the recent volatility.

"The run-up in asset prices has been driven by record low interest rates and ... the withdrawal of monetary stimulus would see prospective returns lower than in recent years," former Australian treasurer Mr Costello told reporters.

"We have also been conscious of the risks across markets as central banks adjust their settings and policy makers attempt to generate sustainable growth.

"This outlook means great volatility and lower prospective returns and we have been adjusting the portfolio accordingly."

The fund had more than a fifth of its assets in cash at the end of 2015, with only 6.5 per cent of its money invested in Australian shares.

Just under a quarter of the fund's assets were global equities, with a heavy skew towards developed economies.

Future Fund asset allocation as at December 31, 2015 Photo: Future Fund asset allocation as at December 31, 2015. (Future Fund)

The Future Fund was established by the Howard government in 2006 to fund what was then $140 billion in public sector superannuation liabilities that will become due by 2020.

The Future Fund estimates that the value of those super liabilities will be around $180 billion in 2019-20.

Mr Costello's caution follows comments last week from the governor of India's central bank Raghuram Rajan who said an era of low rates and quantitative easing had artificially inflated asset prices.

Mr Rajan warned there could be a day of reckoning if asset prices did not ultimately match real world values.

The Future Fund's managing director David Neal said that, as part of reducing global exposure, the fund's private equity portfolio had been rebalanced to lock in gains.

"This has contributed to a rise in our cash holdings that can help us achieve returns in line with our mandate," Mr Neal explained.

Follow Peter Ryan on Twitter @peter_f_ryan.

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