With monetary policy at its limit and multiple risks looming on the horizon, global investment markets are particularly vulnerable to a systemic shock, says Future Fund managing director David Neal.
The Future Fund delivered its 31 December 2016 portfolio update yesterday, and it was a continued message of low prospective returns and heightened risks from chairman Peter Costello and managing director David Neal.
Mr Costello said that given Future Fund's mandate to "avoid excessive risk", the risky environment is "weighing on our minds quite heavily".
He also said that given the low prospective returns for the next five to 10 years, the Future Fund has made submissions to the government to have its investment mandate reconsidered (it is currently CPI plus 4.5 per cent).
As at 31 December 2016 the $127.7 billion Future Fund has returned 7.7 per cent since its inception in May 2006, and 7.8 per cent for the 12 months of 2016.
Commenting on the investment environment, Mr Neal said there are a "number of risks" around the world that are contributing to "fragility in the global investment landscape".
"That’s because with monetary policy so low, any shock is much harder to manage. It’s much harder to take interest rates down when they’re already at or close to or, in some cases, below zero," Mr Neal said.
"It is very difficult to launch a rescue effort on an economy when interest rates are so low."
The Future Fund has been steadily reducing equity risk from its portfolio since 2015, Mr Neal said – when markets were "reasonably strong".
"We’ve been running our portfolio with below normal risk levels for some time. We’ve held that position very constant over the last calendar year. Our risk levels have been constant," he said.
There have been two changes to the portfolio since the 30 September 2016 update: increased exposure to infrastructure (due to the settlement of the Port of Melbourne) as well as private equity.