April 23, 2018 / 3:03 AM / in a year

Australia's sovereign fund flags challenging outlook after target-beating year

SYDNEY, April 23 (Reuters) - Australia’s A$141 billion ($108.1 billion) sovereign wealth fund on Monday said rising global interest rates eroding asset values make its long-term outlook challenging, after the fund exceeded its return-on-investment goal for the year.

In its quarterly update, Future Fund Chairman Peter Costello said the fund had raised its interest in overseas equities and maintained substantial investment in safe-harbour cash.

“Looking forward, the board remains alert to a range of uncertainties and risks, including the response of central banks to the changing economic environment, international political tensions and the potential for shocks to investment markets,” Costello said in a statement.

The fund, established in 2006 to cover escalating pension liabilities for public servants, posted an 8.6 percent return for the year through March 31, beating its 5.8 percent target.

Its allocation of money to equities in developed economies increased 0.9 percentage point to 19.5 percent in the three months through March, mainly at the expense of its cash allocation, which was down 1.6 percentage point at 14.8 percent.

The fund said it had been prepared to take risk in recent quarters given improved global growth, but that there were now longer-term reasons to be cautious as central banks around the world end their expansionary monetary policies.

“Looking at the investment environment, sustained economic growth across the major advanced economies is positive for the near-term, although the longer-term outlook remains challenging,” Costello said. “Interest rates globally are poised to begin rising as the world works through surplus capacity.”

The Future Fund was set up with contributions of A$60.5 billion from government surpluses and proceeds of the privatisation of telecommunications operator Telstra Corp Ltd .

It seeks returns of 4 percent to 5 percent above inflation.

$1 = 1.3041 Australian dollars Reporting by Paulina Duran; Editing by Christopher Cushing

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