The managers of the $109 billion Future Fund have been quietly accumulating cash since September 2014, citing "uncertainty around the economic outlook".
The Future Fund has increased its exposure to cash from 9.8 per cent as at 30 September 2014 to 12.8 per cent as at 31 December 2014 – effectively adding $3.79 billion in cash to the portfolio.
The room for the extra cash in the portfolio has come at the expense of developed market equities, which have been reduced by 3.5 per cent in the final quarter of 2014.
Discussing the changes to the portfolio, Future Fund managing director David Neal said he and his team are forecasting a "muddle through" economic outcome as their 'central case'.
"That is [a case] where growth is somewhat subdued, but portfolio returns and asset class returns are reasonably good," Mr Neal said.
But as time goes by, this 'central case' is more likely to decline, he said – and the global economy is approaching a point where future outcomes could disperse.
"We’re looking at more market volatility, we’re looking at more uncertainty around the economic outlook and that’s at a time when our prospective returns are going down.
"So it makes sense in risk-adjusted terms that we take some risk out of the portfolio and that is what we have done. That said, we still have material exposure to risk assets," Mr Neal said.
Future Fund chief investment officer Raphael Arndt said the portfolio has performed "reasonably well" over the last 12 months.
This is something of an understatement – the fund returned 13.2 per cent per cent in the 2014 calendar year, more than twice its target return of CPI plus 4.5 per cent.
"At the same time the outlook is becoming uncertain – and that means that look-forward returns are becoming increasingly challenging," Mr Arndt said.
"So we’re taking [advantage] of those strong markets to reduce risk moderately, either by selling or considering [selling] a range of public and private assets where the return thesis has played out.
"We’ve also reduced the equities exposure slightly, and we’ve been looking at strategies that are less exposed to broad market returns," Mr Arndt said.
The Future Fund is also looking to take a more "innovative" approach to investing rather than simply taking a "vanilla" interest in markets, he added.
"We're increasing our co-investment activity; looking at things like private markets lending activity across the world; and reviewing our existing portfolios and turning them over and refining them where that’s appropriate," Mr Arndt said.