However, over 10 years, the fund had an average annual return of 8.8%, above its 6.9% target.
"The return is quite solid in the circumstances," said Raphael Arndt, chief executive officer of the Future Fund, during a media call on Wednesday. "The favorable tailwinds that investors have had for decades now have ended. We think investment markets are undergoing profound changes… and we feel that markets are underpricing those risks."
The fund has positioned its portfolio "slightly below neutral risk settings" and has been preparing its portfolio for more volatile markets, geopolitical risk and sticky inflation, he said.
"We're also moving into attractively priced credit and fixed interest opportunities, which will generate much better returns going forward," he added.
Executives moved A$6 billion or 3% of the fund into investment grade credit globally in recent months, he added.
"It's a global mandate, so some of it may well end up in Australia but the mandates to the managers are very broad and give them the flexibility to find parts of the system where credit is underpaid, and where we think we can get attractive returns. It's not something that (is constrained) particularly by geography," he said. Managers were not disclosed.
During the financial year, the fund reduced exposure to cash, private equity, real estate and other alternatives. Cash made up 11.2% of its portfolio as of June 30, compared with 12.1% on June 30, 2022. Private equity allocation was reduced to 16.5% from 17.2% during the same time period, property 6.3% from 6.8%, and other alternatives such as hedge fund exposure were reduced to 17% from 17.8%.
Developed market equities had the biggest bump in allocation to 15.9% from 15% of the portfolio a year earlier. However, looking forward, Mr. Arndt does not anticipate more significant reallocations to global equities.
"Equities are very expensive now. If you go back a year, global equities in Aussie dollars performed incredibly strongly with almost 20% returns. And I don't think the world's gotten less risky through that period," he said.
"We've had central banks start to raise interest rates quite aggressively, and the market speculating on whether we're at the end of those raising cycles or not. Inflation is not back in the band anywhere. And at the same time, we've got economy slowing at best... And then price earnings ratios have gone up. So we certainly don't think equities are more attractive than they were. We're a little skeptical about current market pricing," he added.
Allocation to other asset classes in the Future Fund's portfolio include 8.6% in Australian equities, 5.9% in emerging market global equities, 8.6% in debt securities and 10% in infrastructure and timberland.