October 22, 2018 / 5:40 AM / a month ago

Australia's sovereign fund beats target return, moves cash into private equity

SYDNEY, Oct 22 (Reuters) - Australia’s sovereign wealth fund said on Monday its return on investment for the year to September beat its target by more than double as a strategy of shifting cash into private equity paid off.

In a quarterly update, the Future Fund said it had trimmed its investments in bonds and turbulent stockmarkets, as rising global interest rates and inflation posed challenges to its long-term outlook.

“Inflationary pressures are gradually building in the U.S. and markets continue to respond to rising interest rates,” Future Fund Chairman Peter Costello said.

“While the short-term economic outlook remains reasonably positive, we remain cautious about the longer term outlook, the impact of geopolitical and trade tensions and the potential for shocks to markets.”

The fund, established in 2006 to cover escalating pension liabilities for public servants, said it had increased its fund allocation to private equity investments over the past year by three percentage points to 14.8 percent.

The fund’s investments in cash fell substantially over the same period, from 18.9 percent a year earlier, to 14.4 percent at the end of September. Debt investments also fell one percentage point to 8.8 percent of the portfolio.

“We are dynamically managing the portfolio so that it is, as far as possible, robust to a range of possible scenarios,” fund chief executive David Neal said. “Our portfolio construction continues to emphasise diversification and flexibility.”

It posted a 10.7 percent return over the year to Sept. 30, easily beating its 4.1 percent investment target and helping it grow the fund to A$148 billion ($105.20 billion).

Despite a slight cut in its allocation to developed and emerging market stocks over the last quarter, equities make up 25.3 percent of its portfolio, 1.3 percentage points more than they did a year earlier. ($1 = 1.4069 Australian dollars) (Reporting by Paulina Duran; Editing by Sam Holmes)

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