The $139 billion Future Fund increased its exposure to equities in the final quarter of 2017 in response to “improved economic conditions and steady earnings growth”.
In a 31 December 2017 portfolio update released to the market yesterday, the Future Fund made what chief executive David Neal described as "material but modest" increases to risk in its portfolio.
The fund's cash holding was reduced 2.5 per cent to 16.4 per cent, and debt securities were shaved by 0.2 per cent to 15.2 per cent.
Developed markets were the biggest beneficiary, taking up an additional 2 per cent in the portfolio to 18.6 per cent. Australian equities and emerging market equities increased marginally to 6.4 per cent and 7.7 per cent of the portfolio, respectively.
"Many of the risks that we have been worried about have been somewhat moderated in the near term," Mr Neal said.
"Central banks have shown that they are prepared to be very cautious in any potential removal of their accommodative position.
"All you can do is respond to conditions at the time. What we see at the moment is that risks have declined from where we thought they were. The spread of outcomes is narrowing, and when you narrow a spread of outcomes you can put more risk into the portfolio."
However, the Future Fund is still wary about the medium- to longer-term outlook for markets – and the portfolio could go into 'risk off' mode if things take a turn for the worse.
"There are still high debt levels, and when you put that beside relatively high asset valuations and still very low interest rates, then we still do see vulnerabilities in the market environment," Mr Neal said.
"In the face of some vulnerabilities, that does require us ... to construct a portfolio that is as robust as possible to the various different futures that we might encounter.
"We continue to diversify and we continue to make sure that the portfolio is well protected against any potential shocks that might come at us in the future."
Magellan chairman and CIO Hamish Douglass has said he’s not afraid of missing out on a “short-term market rally” and that mutant virus...