February 3, 2014 / 5:20 AM / 4 years ago

Australia Future Fund surges on switch to equities from debt

SYDNEY, Feb 3 (Reuters) - Australia’s state pension fund surged in value last year, returning a record 17.2 percent and growing to A$96.6 billion as it shifted investment away from debt securities into equities.

Future Fund Chief Investment Officer David Neal said on Monday he remained confident, but acknowledged high rates of return would be more difficult to extract in the future.

The fund’s returns in 2013 were well beyond its mandate of inflation plus 4.5 to 5.5 per cent per year, its portfolio update to Dec. 31 showed.

The fund, created in 2006 by the federal government to pay pensions of state employees, has increased its portfolio from A$82.4 billion a year ago.

Established with contributions of $60.5 billion, the fund has made a return of 6.9 per cent per annum, just shy of its long term target of 7.2 per cent per annum.

Over the past five years the fund has generated 10.6 per cent per annum.

Neal said that the fund built up its equity exposure at the expense of debt securities because “the significant opportunities that we had identified in credit (instruments) ... had largely played out.”

“Equities at the beginning of last year presented the more interesting opportunity,” he said.

The fund increased its allocation to global equities, both in developed and emerging markets, to 33.1 percent of its total assets at the end of 2012 from 23.4 percent a year earlier, while running down debt securities to 12.2 percent from 19.1 percent.

Managing Director Mark Burgess said recent rates of return for investors have been heavily driven by a declining cost of capital and future returns will increasingly need to be driven by global growth.

Reporting by Jane Wardell; Editing by Simon Cameron-Moore

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