The $154 billion Future Fund has delivered a 5 per cent return for the March quarter buoyed by three months of strong equity markets, according to a portfolio update released on Monday.

The chair of Australia’s sovereign wealth fund, Peter Costello, put the positive result down to the US Federal Reserve’s decision to hold interest rates steady and easing US-China tensions.

The Fed’s decision in March to keep interest rates on hold following a market rout sparked a huge rise in share prices. However, despite the solid result, Costello warned that longer term, the global economy will face structural challenges, including demographic shifts and high levels of debt.

“Long-term real yields remain very low, indeed negative in a number of major economies, which implies that long-term prospective returns will be lower relative to history,” he said.

The strong gains from equity markets during the March quarter helped drive the fund’s 10 year returns to 10.4 per cent, far outpacing its benchmark target return of 6.5 per cent.

The March quarter of 5.0 per cent compares to a loss of 1.2 per cent for the immediately preceding quarter.

Volatility in the final quarter of 2018 led to a $1.8 billion fall in assets from $148.8 billion to $147 billion.

Chief executive David Neal said the fund continues to perform strongly against its investment mandate, delivering strong long-term returns without excessive risk.

“As we navigate a complex investment environment we are focused on constructing the most efficient portfolio possible for generating strong long-term returns,” he said in a release.

“To that end, we continue to prioritise and balance diversification and flexibility while carefully managing risk.”

The portfolio update shows the fund has taken on more risk albeit at the margin.

The fund’s exposure to listed equities, which stands at 33 per cent, increased by $7.6  billion to $50.72 billion for the quarter, as equity markets rose. The allocation to equities up on the 29.4 per cent, worth $43.12 billion, at December, 2018.

Importantly, the fund’s allocation to illiquid assets such as infrastructure, property, private equity and alternatives has dropped to 44.6 per cent, from 46.1 per cent, although asset values rose by $1.2 billion to $68.9 billion.

The update showed the fund holds 9.3 per cent of assets in debt securities and 13.2 per cent in cash.

Australia’s sovereign wealth fund has earned $94 billion in returns since being established in 2006 and is up 5.9 per cent so far this year, beyond its target of 3.9 per cent.

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