The Federal government’s $129 billion Future Fund is taking a conservative approach to investment, building its cash reserves and reducing its exposure to Australian shares over the three months to March 31, according to its most recent performance update.

The fund, which will pay for Commonwealth public service superannuation pensions, continues to outperform its investment benchmark. It has returned 10.5 per cent for the March year compared to a target of 6.6 per cent and since inception it has returned 7.7 per cent, again, well ahead of its target.

“The Board remains conscious of uncertainty around global growth, global monetary policy, international political tensions and the potential for shocks to investment markets. We also expect prospective returns to be lower than in recent times,” said chairman Peter Costello.

“With all this in mind we continue to take a patient approach to investing, balancing the need to deliver returns against our obligation not to take excessive risk,” Mr Costello said.

By 2020 it needs to be able to cover the cost of the Commonwealth’s unfunded super payments, which are estimated to be somewhere around $7 billion a year by then. To do that the government has planned for a $140 billion investment kitty.

If the fund were to grow at its target rate of 4.5 per cent to 5.5 per cent above inflation, then it will get there. Currently it is outstripping this target and if current returns are maintained it should be positioned to do what is was designed to do.

The fund boosted its exposure to alternative asset classes from 14.2 per cent of the portfolio in December to 15.1 per cent in March.
The update showed the portfolio’s cash allocation grew to 20.4 per cent, from 19.7 per cent at December 31, making the  asset class its largest at $26.5 billion despite record low interest rates cutting its earning power.

The fund’s exposure to Australian equities fell 0.2 percentage points to 6.5 per cent. Australian shares in the portfolio were valued at $8.4 billion, compared to $8.5 billion three months earlier.

Equity holdings in developed markets equities rose to 15.2 per cent of the portfolio, from 15 per cent while holdings of emerging market stocks eased slightly to 7.3 per cent from 7.4 per cent.

“We continue to cautiously and prudently manage the assets of the Future Fund. Given the uncertain and challenging outlook for investment returns, we are focused on maintaining our discipline to only take risk where it is adequately rewarded,” said CEO David Neal.

“Over the quarter we deployed capital into our Private Equity program, primarily through co- investments in venture capital and growth. Our cash allocation has reduced largely due to the fall in the Australian dollar against the US dollar over the period,” Mr Neal said.

“We also reached financial close on the Port of Melbourne transaction during the quarter, which is reflected in our infrastructure allocation,” he said.